The RBI has issued the Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, effective from 17 February 2021. The said Directions aim to prevent the affairs of any Housing Finance Company (HFC) from being conducted in a manner detrimental to the interest of investors and depositors. They supersede ten earlier notifications issued by the National Housing Board (NHB) between 1 July 2019 to 22 October 2020. The Board of every HFC is to ensure that these directions are complied with.

An HFC is defined as an NBFC whose financial assets in the business of providing finance for housing constitute at least 60 per cent of its total assets. The Master Directions provide for the maintenance of liquidity coverage ratio, risk management, asset classification and loan-to-value ratio, among others. It also gives a list of regulations prescribed for NBFCs which will apply mutatis mutandis to HFCs, such as guidelines on liquidity risk management framework, securitisation transactions, liquidity coverage ratio, loans against security of shares, etc.

Some of the key directions are as under :

1. Minimum Liquidity Coverage: HFCs may achieve minimum liquidity coverage in a two-phased manner. All non-deposit taking HFCs with an asset size of Rs 10,000 crore and above, and all deposit-taking HFCs irrespective of their asset size will have to achieve a minimum liquidity coverage of 50% by 1 December, 2021 and gradually to 100% by 1 December, 2025. Non-deposit-taking HFCs with an asset size of Rs 5,000 crore and above, but less than Rs 10,000 crore will have to reach a minimum liquidity coverage of 30% by 1 December, 2021 and to 100 per cent by 1 December, 2025.

2. Loan-to-value Ratio: HFCs lending against the collateral of listed shares shall maintain a loan-to-value (LTV) ratio of 50%. Any shortfall in the maintenance of the 50% LTV occurring on account of movement in the share price is to be made good within seven working days. For loans granted against the collateral of gold jewellery, HFCs shall maintain an LTV ratio not exceeding 75%.

3. Housing loans: For housing loans to individuals up to Rs. 30 lakh, the LTV ratio shall not exceed 90% ; above Rs 30 lakh up to Rs 75 lakh, LTV ratio shall not exceed 80% ; above Rs 75 lakh not LTV ratio shall not exceed 75%.

4. Acceptance/Renewal of Public Deposits: A HFC is prevented from accepting or renewing public deposit unless it obtains a minimum investment grade rating for fixed deposits from any one of the approved credit rating agencies, at least once a year.

No HFC can invite or accept or renew public deposit at a rate of interest exceeding 12.5 per cent per annum or as revised by the RBI.

HFCs shall ensure that full cover is available for public deposits accepted by them at all times. In case an HFC fails to repay any public deposit or part thereof as per the terms and conditions of such deposit, as provided in Section 36A (1) of NHB Act, 1987, it cannot grant any loan or other credit facility or make any investment or create any other asset as long as the default exists.

5. Minimum capital ratio: Every HFC shall maintain a minimum capital ratio on an ongoing basis consisting of tier-I and tier-II capital. This ratio shall not be less than 13% as on 31 March 2020, 14% on or before 31 March 2021 and 15% on or before 31 March 2022 and thereafter.

6. Bar on lending against own shares: HFCs are barred from lending against their own shares.

7. Exposure to capital market: The aggregate exposure of an HFC to the capital market in all forms (both fund based and non-fund based) should not exceed 40% of its net worth as on March 31 of the previous year.

8. Investments and borrowing exposure to single company/single group of companies: An HFC cannot lend to any single borrower exceeding 15% of its owned fund and to any single group of borrowers exceeding 25% of its owned fund. It cannot invest in the shares of another company exceeding 15% of its owned fund and in shares of a single ?(pl see point b under para 20.1.2) group of companies exceeding 25% of its owned funds. These directions are aimed at limiting the concentration of credit/investment.

In case a HFC prefers to undertake exposure in group companies, such exposure, by way of lending and investing directly or indirectly, cannot be more than 15% of owned fund for a single entity in the group and 25% of owned fund for all such group entities.

In case of companies in a group engaged in real estate business, HFCs may undertake exposure either to the group company engaged in real estate business or lend to retail individual home buyers in the projects of such group companies.

9. Notification of HFC as Financial Institution under SARFAESI Act, 2002: Subject to fulfilling certain conditions, an HFC can apply to the NHB, to be recognised as a “Financial Institution” under Section 2(1)(m)(iv) of SARFAESI Act. The NHB , in turn will recommend the Central Government, to make such notification. However, an HFC which is notified as a Financial Institution is subject to denotification, if the individual housing loan portfolio has fallen below 50% of total loan portfolio in two consecutive financial years or if an adverse report has been received from a regulatory authority like SEBI, IRDAI, SFIO, etc.

10. Guidelines for entry of HFC into Insurance Business: An HFC having the prescribed Net Owned Fund of Rs. 20 crores may take up insurance agency business on fee basis without any risk participation and without the approval of the RBI. However, permission from the IRDAI and compliance with its regulations for acting as ‘composite corporate agent’ with insurance companies is required. There should be no ‘linkage’ either direct or indirect between the provision of financial services offered by the HFC to its customers and use of the insurance products. The guidelines also provide for setting up insurance Joint Venture (JV) with equity contribution on risk participation basis; making investments in the insurance company; putting in place a Board approved policy for insurance distribution; ensuring customer appropriateness and suitability; prohibition on payment of commission/ incentive directly to HFC staff; and transparency and disclosures.

11. Guidelines on wilful defaulters: The Directions prescribe a set of guidelines to put in place the mechanism of reporting information on wilful defaults of Rs. 25 lakh and above by HFCs to all Credit Information Companies. The default to be categorized as wilful, must be intentional, deliberate and calculated. HFCs are required to initiate the prescribed penal measures against the identified wilful defaulters.

To refer to the RBI Master Directions dated 17 February 2021, click here.