RBI issues directions for housing finance companies

RBI | Representative Image.

RBI | Representative Image.

The Reserve Bank of India (RBI) came out with a slew of directions related to maintenance of liquidity coverage ratio, risk management, asset classification and loan-to-value ratio, among others, for housing finance companies (HFCs).

The central bank said these directions, which shall come into force with an immediate effect, are aimed at preventing the affairs of any HFCs from being conducted in a manner detrimental to the interest of investors and depositors.

“All non-deposit taking HFCs with asset size of Rs 100 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 RBI said.

The board of each HFC would ensure that the guidelines are adhered to.

The RBI issued a Master Direction-Non-Banking Financial Company-Housing Finance Company (Reserve Bank) Directions, 2021, on Wednesday.

As per the definition, an HFC is an NBFC whose financial assets, in the business of providing finance for housing, constitute at least 60 per cent of its total assets.

The RBI said 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 (HQLA) to survive any acute liquidity stress scenario lasting for 30 days.

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 LCR of 50 per cent By December 1, 2021 and gradually to 100 per cent by December 1, 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 LCR of 30 per cent by December 1, 2021 and to 100 per cent by December 1, 2025.

As per the new directions, HFCs lending against the collateral of listed shares shall maintain a loan-to-value (LTV) ratio of 50 per cent.

“Any shortfall in the maintenance of the 50 per cent LTV occurring on account of movement in the share price shall be made good within seven working days,” the central bank said.

For loans granted against the collateral of gold jewellery, HFCs shall maintain an LTV ratio not exceeding 75 per cent.

The central bank also prevented HFC to accept or renew public deposit unless it has obtained a minimum investment grade rating for fixed deposits from any one of the approved credit rating agencies, at least once a year.

“No HFC shall invite or accept or renew public deposit at a rate of interest exceeding twelve and half per cent per annum or as revised by the Reserve Bank,” the RBI said.

The RBI asked HFCs to ensure that at all times, 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 as long as the default exists, as per the directions.

The central bank also barred HFCs to lend against their own shares.

“No housing finance company shall grant housing loans to individuals up to Rs 30 lakh with LTV ratio exceeding 90 per cent and above Rs 30 lakh and up to Rs 75 lakh with LTV ratio exceeding 80 per cent,” the directions said.

These entities also cannot offer housing loans to individuals above Rs 75 lakh with LTV ratio exceeding 75 per cent.

Every housing finance company shall maintain a minimum capital ratio on an ongoing basis consisting of tier-I and tier-II capital, which shall not be less than 13 per cent as on March 31, 2020, 14 per cent on or before March 31, 2021, and 15 per cent on or before March 31, 2022, and thereafter, the RBI said.

An HFC also cannot lend to any single borrower exceeding 15 per cent of its owned fund, and any single group of borrowers exceeding twenty-five per cent of its owned fund.

It also cannot invest in the shares of another company exceeding 15 per cent of its owned fund and in shares of a single group of companies exceeding 25 per cent of its owned funds.

“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 per cent of owned fund for a single entity in the group and 25 per cent of owned fund for all such group entities.

The RBI said the aggregate exposure of an HFC to the capital market in all forms (both fund based, and non-fund based) should not exceed 40 per cent of its net worth as on March 31 of the previous year.