RBI’s regulations for HFCs: Non disruptive

The Reserve Bank of India (RBI) on Wednesday proposed to tighten the rules governing housing finance companies (HFCs), including putting restrictions on lending to builders and doubling the minimum net owned funds criterion.

Through these changes, the regulator of lenders in India, seeks to review the extant regulatory framework of HFCs and issued revised guidelines.

The proposed guidelines are not disruptive to the way listed HFCs are currently operating but it does seek to streamline regulations in a defined manner and reduce the regulatory arbitrage which HFCs have traditionally had over their non-banking finance companies (NBFC) counterparts.

The proposed changes to regulation are expected to ebb the valuation-driven hunger for HFC licences witnessed over the past few years.

Key changes being proposed by the RBI is the definition of “housing finance” and “qualifying assets” wherein it says that 50% of net assets of HFCs should be towards Housing finance (excluding LAP, CRE, LRD etc.) and 75% of such assets towards individual housing loans.

Most of the listed HFCs pass the muster with respect to 50% qualifying asset requirement and 75% of that being individual loans

For the segment leader HDFC, if it applies to consolidated balance sheet, qualifying assets (housing finance excluding LAP, CRE, LRD) would get very close to 50% – given huge investment book in associate & subsidiaries.

The regulator’s proposal has also clearly defined HFCs and those that are systemically important among them.

Non-deposit taking HFCs with asset size of Rs 500 crore and above; and all deposit taking HFCs irrespective of asset size will be treated as systemically important HFCs.

HFCs with asset size below Rs 500 crore will be treated as non-systemically important HFCs.

It also proposed that HFCs should not be simultaneously allowed to lend to a real estate developer as well as homebuyers in the developer’s project.

All other loans, including those given for furnishing dwelling units, loans given against mortgage of property for any purpose other than buying/construction of a new dwelling unit/s or renovation of the existing dwelling unit/s, will be treated as non-housing loans.

The proposed changes in the rules have come following RBI’s taking over as the regulator of mortgage lenders from National Housing Bank (NHB) in August 2019.

Following the review of the rules, home financiers will now be regulated as a category of NBFC. Under the NHB regulations, there was no formal definition of housing finance.

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