Revised RBI Guidelines for Housing Finance Companies

As you know that our country is facing liquidity issues and the COVID-19 outbreak has not done any good to it especially the real estate sector. The government has been taking various measures to increase the liquidity inflow in the country. For the same, The Reserve Bank of India (RBI) made amendments to the administrative structure for housing finance companies (HFCs) on 22 October 2020.

The Apex Bank directed HFCs to lend at least 60% of their net assets to housing through the final RBI guidelines issued on 22 October, which is a follow-up to a drafted issued in June 2020. The RBI has also ordered HFCs and non-banking financial institutions, which may not currently lend an appropriate amount of their total housing loans, to achieve this stage by March 2024.

Net assets deployed for housing loans by HFCs

Timeline Min % of total assets Min % of total assets for individual

March 31, 2022 50% 40%

March 31, 2023 55% 45%

March 31, 2024 60% 50%

[Source: RBI]

“These HFCs are expected to submit a board-approved plan to the Reserve Bank within a period of three months, including a roadmap to meet the above-mentioned requirements and a schedule for transition,” read the final RBI guidelines.

The followings are the highlights of the Amendment made for HFC by RBI:

As per the RBI guidelines issues the word ‘providing finance for housing’ or ‘housing finance’ is not formally specified in past and hence they gave a formal definition of what housing finance means as follow:

1. Loans to individuals or group of individuals including co-operative societies for construction/ purchase of new dwelling units.

2. Loans to individuals for purchase of old dwelling units.

3. Loans to individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.

4. Loans to individuals for purchase of plots for construction of residential dwelling units provided a declaration is obtained from the borrower that he intends to construct a house on the plot within a period of three years from the date of availing of the loan.

5. Loans to individuals for renovation/ reconstruction of existing dwelling units.

6. Lending to public agencies including state housing boards for construction of residential dwelling units.

7. Loans to corporates/ Government agencies (through loans for employee housing).

8. Loans for construction of educational, health, social, cultural, or other institutions/centres, which are part of housing project in the same complex and which are necessary for the development of settlements or townships;

9. Loans for construction of houses and related infrastructure within the same area, meant for improving the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the guarantee of the central Government, or indirectly to them through the State Governments;

10. Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies;

11. Lending to builders for construction of residential dwelling units.

All other loans, including those for furnishing residential units, loans to mortgage property for any reason other than the purchase / building of a new residential unit / s or the renovation of an existing residential unit / s as defined above, shall be treated as non-housing loans and shall not come under the scope of housing finance.

HFCs’ related to real estate builders:

RBI’s update states that “In order to resolve double financing issues arising from loans to construction firms in the group and also to individuals buying flats from the group, the HFC concerned can only decide to loan for one. That is, in the projects of group companies, the HFC may either disclose the group company to the real estate market or lend to retail individual home buyers, but not do both. If the HFC intends to directly or indirectly take over any exposure in its group entities (loans and investments), the exposure may not be more than 15% owned by the group entity and 25% owned by the group entity for all other group entities. The HFC will follow the principles of arm’s length in letter and spirit with respect to extending loans to individuals who want to purchase housing units from companies in the association.”

Foreclosure Charges:

No foreclosure fees / pre-payment penalties shall be imposed on any floating rate term loan sanctioned for purposes other than business to individual borrowers with or without co-obligators, as a measure of consumer security and also in order to bring uniformity with regard to the repayment of different loans by borrowers of banks and NBFCs. As similar regulations for HFCs are not currently recommended, it is suggested that these directives be applied to HFCs.

Liquidity coverage ratio (LCR) norms:

LCR is the amount of liquid assets that banks set aside to satisfy short-term necessities. The RBI guidelines have ordered that HFCs preserve an LCR liquidity buffer, which will facilitate HFCs’ stability to possible liquidity disruptions by ensuring that they have adequate funds to withstand any acute 30-day liquidity stress scenario.

Timeline and ratio norms on LCR:

All non-deposit-taking HFCs with asset size of Rs 5,000 crores and above, but less than Rs 10,000 crores, with the timeline as:

From 1/12/2021 1/12/2022 1/12/2023 1/12/2024 1/12/2025

Minimum LCR 30% 50% 60% 85% 100%

All the non-deposit taking Housing Finance Companies with asset size of Rs 10,000 cr and above, and all the deposit taking Housing Finance Companies, irrespective of their asset size:

From 1/12/2021 1/12/2022 1/12/2023 1/12/2024 1/12/2025

Minimum LCR 30% 50% 60% 85% 100%

[Source: RBI]

While specifying that the minimum net-owned fund should be Rs 20 crores for a company to commence services as an HFC, the notification also specified that company will be excluded as HFCs and will be regarded as NBFC-Investment and Credit Companies (NBFC-ICC) unable to comply with these RBI guidelines within the fixed timelines. To get a conversion certificate to the same effect, they will have to approach the RBI, subsequently.

Banks can restructure builders’ loans on the basis of projects, says the RBI:

The Reserve Bank of India ( RBI) said banks should restructure loans from real estate firms at the level of the project rather than at the level of the developer. This implies that default would not affect loan restructuring for a builder at the corporate level. Since each real estate projectwould have its own set of risks, the RBI has directed banks to separately assess the risks associated with each project and call for credit restructuring on that basis.

However, to be qualified for restructuring, the project must meet some specific criteria. The banking regulator clarified that if the debt was classified as normal and not overdue, as, on March 1, 2020, lenders could restructure loans taken over by a developer during the current financial year. This assumes that financial institutions will only restructure loans from developers who have been consistently repaying their loans as of March 1, 2020, and who have not been overdue for more than 30 days. This also means that, under the COVID-19 stress fund, housing projects where defaults were made prior to the Coronavirus era would not be eligible to gain.

[Source: RBI notification as of 22 October 2020]

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