The Reserve Bank of India (RBI) has recently issued new directives to Housing Finance Companies (HFCs), which are specialized Non-Banking Financial Companies (NBFCs). Now, to qualify as an HFC, a NBFC must have 50% of its assets as housing loans, with 75% of those being for individual homebuyers. These new guidelines, coming into force immediately, are designed to prevent HFCs from conducting business in ways that could be detrimental to investors and depositors.
New Definitions and Regulations for HFCs
In 2019, the RBI assumed authority to regulate HFCs, taking over from the National Housing Bank (NHB). The new rules stipulate liquidity risk management practices that all non-deposit taking HFCs with an asset size of Rs.100 crore and above, and all deposit-taking HFCs, must follow. This includes adhering to gap limits and making use of liquidity risk monitoring tools.
Liquidity Coverage Ratio (LCR)
Under the new guidelines, HFCs are required to maintain a certain LCR. This means they should have enough High-Quality Liquid Asset (HQLA) to survive for 30 days under any acute liquidity stress scenario. This provision is expected to enhance their resilience against potential liquidity disruptions.
Loan-To-Value (LTV) Ratio Requirements
For loans granted against the collateral of listed shares, HFCs must adhere to a 50% LTV ratio. Meanwhile, an LTV ratio not exceeding 75% should be maintained for loans granted against the collateral of gold jewellery.
Investment Grade Rating and Public Deposits
The RBI also now requires HFCs seeking to accept or renew public deposits to have obtained a minimum investment grade rating for fixed deposits from any one of the approved credit rating agencies at least once a year.
In addition, HFCs should ensure that there is full cover available for public deposits accepted by them at all times. If an HFC fails to repay any public deposit or part thereof, the RBI disallows it from granting any loans or other credit facilities or making any investment or creating any other asset as long as the default exists.
Capital Adequacy Ratio (CAR) and Lending Limit
HFCs are expected to maintain a minimum CAR at all times. This ratio should not be less than 13% as of March 2020, 14% on or before March 2021, and 15% on or before March 2022.
An HFC is also now restricted from lending to any single borrower exceeding 15% of its owned fund, or lending to any single group of borrowers exceeding 25% of its owned fund.
Investment in Other Companies & Market Exposure
An HFC is barred from investing 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 funds. Moreover, the aggregate exposure of an HFC to the capital market in all forms should not exceed 40% of its net worth as of March 31 of the previous year.
These recent developments are aimed at better regulating HFCs and ensuring the protection and best interests of depositors and investors.