RBI’s Missed Opportunity In Strengthening Governance Of Housing Finance Firms
The Reserve Bank of India has proposed a new set of rules to govern housing finance companies, on which it has sought public feedback before the guidelines are finalised.
The proposed framework has followed the transfer of regulation of HFCs from the National Housing Bank to the RBI, which itself was a consequence of governance concerns laid bare by the collapse of Dewan Housing Finance Corporation Ltd.
The proposals broadly seek to harmonise regulations between HFCs and non-bank lenders that are governed by the RBI. The issues that have been tackled in the proposed framework are definition and proportion of “qualifying assets” that a company must hold to be classified as an HFC, capital and liquidity rules that apply to these firms. It also introduces a useful provision to prevent double financing to a developer and customers purchasing units in the development.
The framework, however, fails to close an important loophole on restructuring of developer loans. In doing so, the regulator has diluted its so-far tough stance on avoiding broad-based forbearance for restructured loans.
Restructuring: RBI Vs NHB
Until 2019, HFCs were governed by the NHB regulations. These regulations defined standard and sub-standard assets for HFCs.
According to the NHB’s Housing Finance Directions (2010), while restructured assets were to be marked as “sub-standard”, an exception was provided.
“Provided that where a delay in completion of a project is caused on account of factors beyond the control of the project implementing agency, terms of the loan agreement regarding interest and/ or principal may be rescheduled once before the completion of the project and such loans may be treated as standard asset, subject to the condition that such reschedulement shall be permitted only once by the board of directors of the concerned housing finance company and that interest on such loan is paid regularly and there is no default...”
In simple terms, developer loans could be restructured once without being marked down as sub-standard. The provision, according to industry executives, was widely used since such a restructuring only needed a board approval and there was no specific definition of “factors beyond the control of project implementing agencies”.
Since HFCs were not required to disclose these restructured loans, uncertainty has persisted on the extent of restructuring. This should be changed immediately and any restructuring should be disclosed on a quarterly basis, along with results, said Sridhar Sivaram, investment director at Enam Holdings.
It is high time that the RBI streamlines the NPA recognition norms across the financial sector. HFCs, in particular, still have the option to restructure the builder/real estate developer/corporate loans under Section 2(zc) of the HFC (NHB) Directions 2010. Unfortunately, there is no reporting requirements of these restructured loans to any of the stakeholders such as shareholders or even banks.Sridhar Sivaram, Investment Director, Enam Holdings.
The new provisions, Sivaram said, can be implemented on a prospective basis, however, a one-time disclosure of the stock of restructured loans in the books of the HFCs would be useful. “Increased disclosures will help in strengthening the sector over the medium to long term. The entire DHFL episode, in my view, is a result of poor disclosure requirements. DHFL was running substantially higher NPAs, but was able to avoid reporting the same due to some poor regulations.”
But not everyone agrees that a change in the rules for restructuring will make a material difference, at least prospectively.
“A change in the rules for classification of restructured developer loans may not make a significant difference in the current context for a few reasons,” said Krishnan Sitaraman, senior director for financial sector ratings at Crisil Ltd.
First, developer loans are not a significant portion of the loan book of many HFCs, Second, given that a large chunk of developer loans are under moratorium, there may not be too much of restructuring required immediately. Third, the RBI has already provided a special dispensation to both banks and NBFCs by allowing a one-year extension on the date of commencement of commercial operations for loans to commercial real estate projects.Krishnan Sitaraman, Senior Director - Financial Sector Ratings, Crisil
Allowing HFCs to restructure without an asset classification downgrade would also be a departure from the RBI’s opposition to regulatory forbearance. Such forbearance was ended in 2014 as it had led to under-reporting of bad loans. Since then, the RBI has permitted restructuring relief to MSMEs and banks are arguing for more wide-spread regulatory forbearance.
To be sure, the RBI, in its draft framework, did acknowledge that significant differences continue to exist in the regulations for banks and HFCs. It listed income recognition, asset classification and provisions norms as one such area.
“There are major differences in provisioning norms applicable to standard, sub-standard and doubtful assets in HFCs’ books...” the regulator said, adding these would be harmonised “in a phased manner over a period of two to three years...”
Srinath Sridharan, an adviser to financial sector firms, said few areas of regulatory arbitrage continue between HFCs and banks and the RBI will likely tackle them over time.
“There would be a temptation to allow the arbitrage to continue to avoid putting more pressure on the system right now,” said Sridharan. Any additional provisioning requirements at this stage would put additional strain on capital-raising and many financial institutions would be in tight spot for the next few quarters, until market sentiment improves, allowing them to raise capital.
It, however, would be prudent to reduce this arbitrage over a period of time, Sridharan said.
Sitaraman said, “We need to also keep in mind that this is the first step that the RBI is taking to harmonise regulations between HFCs and NBFCs and a wide spectrum of operations have been covered in the proposed changes to the extant regulatory framework; the objective may be to bring in changes wherever needed without causing too much disruption.”