The RBI’s draft proposal to harmonise regulations across various non-bank finance companies (NBFCs), in particular, for housing finance companies is a long overdue. The proposal, as laid out in its discussion paper reviewing the existing regulatory framework governing housing finance companies, rele
The RBI’s draft proposal to harmonise regulations across various non-bank finance companies (NBFCs), in particular, for housing finance companies is a long overdue. The proposal, as laid out in its discussion paper reviewing the existing regulatory framework governing housing finance companies, released on 17 June 2020) should go a long way in reining in unscrupulous HFCs and, thereby, help in the on-going process of cleaning up the real estate sector.
It is widely accepted that the reason for the dramatic failure of financial entities can often be laid at the door of regulatory arbitrage. The broad principle is that while licensed entities like banks should be subject to strictest regulation, non-bank financial entities will be subject to lighter touch regulation.
To start with, housing finance and HFCs have been clearly defined and a clear distinction has been made between financing dwelling units and financing developers. HFCs, defined as those that have at least 50% of their assets as housing loans and of which at least 75% should be for individual home buyers, are to be brought on par with other NBFCs as far as prudential regulations as concerned, albeit over a period of two to three years.
Hence, regulations regarding capital requirements, risk weights, provisioning norms, income recognition, asset classification and provisioning norms, limits on exposure to commercial real estate & capital market (CME) and public deposits will no longer be different for HFCs and other NBFCs. Limits have been prescribed for investment in commercial real estate in the form of land and building and for investment in group companies. At the same time, in order to discourage fly-by-night operators, the requirement of Net-Owned-Funds (NOF) is proposed to be doubled from Rs 10 crore to Rs 20 crore.