Bringing housing finance companies (HFCs) under closer scrutiny, while safeguarding interests of investors and depositors, the Reserve Bank of India (RBI) has issued master directions. These directions cover maintenance of liquidity coverage ratio, risk management, asset classification and loan-to-value ratio for HFCs. Amidst the increasing concern of investor-depositors, the central bank has also asked HFCs to always ensure that there is full cover available for public deposits accepted by them.
“In case HFC fails to repay any public deposit or part thereof as per the terms, it shall not grant any loan or other credit facility or make any investment or create any other asset as long as the default exists,” the RBI says.
The Reserve Bank also barred HFCs from lending against their own shares. Further it has asked all HFCs to achieve a minimum liquidity coverage of 30%-50% by 1 December 2021 and increase it gradually to 100% by 1 December 2025.
Talking about liquidity risk management, the central bank says, "All non-deposit taking HFCs with asset size of Rs100 crore and above and all deposit taking HFCs (irrespective of asset size) shall pursue liquidity risk management, which inter alia should cover adherence to gap limits, making use of liquidity risk monitoring tools and adoption of stock approach to liquidity risk.”.
The board of every HFC would have to ensure that the guidelines are adhered to.
The master directions bring into effect the revised regulatory framework and comprehensive rules announced on 22 October 2020, based on feedback from all stakeholders. This is part of the process of transferring the regulations of these companies from the National Housing Bank (NHB) to the RBI.
This means the RBI has now strengthened the disclosure standards. Every HFC must disclose details of capital adequacy ratio and exposure to the real estate sector, both direct and indirect, in their notes to the balance sheet. They must disclose the maturity pattern of assets and liabilities and the percentage of outstanding loans against collateral of gold jewellery to their assets. They must also give details of penalty by the RBI or the NHB or any adverse comments made in writing by the RBI or the NHB on regulatory compliances.
How does it impact you?
• No foreclosure charges/ pre-payment penalties on floating rate term loan: The RBI has said that HFCs cannot impose foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers.
• Mandatory minimum investment grade rating for FDs: RBI has also prevented HFCs from accepting or renewing public deposit unless they have obtained a minimum investment grade rating for fixed deposits from any one of the approved credit rating agencies, at least once a year. The guidelines say "No HFC shall invite or accept or renew public deposit at a rate of interest exceeding twelve and a half per cent per annum or as revised by the Reserve Bank”.
• Full Cover for Public Deposits: The RBI has also asked HFCs to always ensure that, there is full cover available for public deposits accepted by them. In case an HFC fails to repay any public deposit or part thereof as per the terms, it shall not grant any loan or other credit facility or make any investment or create any other asset if the default exists, as per the directions. The banking regulator also barred HFCs from lending against their own shares.
• Provision for Losses: HFCs need to classify assets into four categories of standard, sub-standard, doubtful & loss assets. In loss assets, entire asset shall be written off and if assets are permitted to remain in books, 100% of outstanding to be provided for.
As per the definition, an HFC is an NBFC (non-banking finance company) whose financial assets, in the business of providing finance for housing, constitute at least 60% of its total assets. HFCs that do not meet the prescribed criteria need to submit a board-approved plan to the RBI within three months including a road-map to fulfil this criterion and the timeline for transition
As per the guidelines, HFCs shall maintain a liquidity buffer in terms of liquidity coverage ratio (LCR), which will promote their resilience to potential liquidity disruptions by ensuring that they have sufficient high-quality liquid asset to survive any acute liquidity stress scenario lasting for 30 days.
All non-deposit taking HFCs with an asset size of Rs10,000 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 Rs5,000 crore and above, but less than Rs10,000 crore will have to reach a minimum liquidity coverage of 30% by 1 December 2021 and to 100% by 1 December 2025.
As per these guidelines, HFCs lending against the collateral of listed shares are required to maintain a loan-to-value (LTV) ratio of 50%. The RBI has said "Any shortfall in the maintenance of the 50% LTV occurring on account of movement in the share price shall be made good within seven working days."
For loans granted against the collateral of gold jewellery, HFCs are asked to maintain an LTV ratio of not exceeding 75%. This means, the lenders cannot give a loan of more than 75% of the value of gold given as collateral.
For housing loans, RBI says, "No HFC should grant housing loans to individuals up to Rs30 lakh with LTV ratio exceeding 90% and above Rs30 lakh and up to Rs75 lakh with LTV ratio exceeding 80%". This means for a home priced at Rs30 lakh, the borrower is eligible to receive 90% or Rs27 lakh as loan. For a home valued at Rs75 lakh, the borrower can receive a maximum loan of Rs60 lakh (80% of the value).
Every HFC has been asked to maintain a minimum capital ratio on an ongoing basis consisting of tier-I and tier-II capital, which should 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.
HFC are also barred from lending more than 15% of its owned fund to any single borrower. For a single group of borrowers, this is capped at 25% of its owned fund. The HFC also cannot invest in the shares of another company exceeding 15% of its owned fund and in shares of a single group of companies exceeding 25% of its owned fund.
"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," the new directions said. In case 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. “The HFC would in all such cases follow arm’s length principles in letter and spirit”.
The RBI has also stated in the master guidelines that the aggregate exposure of an HFC to the capital market in all forms (both funds based, and non-fund based) should not exceed 40% of its net worth as on 31 March of the previous year.
Within this overall ceiling, direct investment in shares, convertible bonds or debentures, units of equity-oriented mutual funds and all exposures to venture capital funds (VCFs) should not exceed 20% of its net worth. The capital market exposure will also include advances against shares, bonds, debentures or other securities to individuals for investment in shares, including initial public offering (IPO) and employee stock ownership plan (ESOPs), convertible bonds, and secured and unsecured advances to stockbrokers.
