RBI Proposes Regulatory Parity Between Non-Bank Lenders, Housing Financiers

The Reserve Bank of India has proposed to introduce greater parity between norms for housing financiers and non-bank lenders, 10 months after it received direct regulatory control of the former.

As part of a set of draft guidelines that the central bank released on Wednesday, it has proposed new definitions for companies which can qualify as housing financiers. Accordingly, any company in which 50% of its outstanding loans are towards assets which qualify for housing can be classified as a housing financier. About 75% of such loans will have to be toward individual housing loans, the draft guidelines has proposed.

Loans Which Qualify As Housing Loans

• Loans to individuals or group of individuals, including co-operative societies, for construction or purchase of new dwelling units.
• Loans to individuals for purchase of old dwelling units.
• Loans to individuals for purchasing old or new dwelling units by mortgaging existing dwelling units.
• Loans to individuals for purchase of plots for construction of residential dwelling units provided a declaration is obtained from borrowers that they intend to construct a house on the plot within a period of three years from the date of availing of the loan.
• Loans to individuals for renovation or reconstruction of existing dwelling units.
• Lending to public agencies, including state housing boards, for construction of residential dwelling units.
• Loans to corporates or government agencies (through loans for employee housing).
• Loans for construction of educational, health, social, cultural or other institutions or centres, which are part of housing project in the same complex and which are necessary for the development of settlements or townships.
• Loans for construction of houses and related infrastructure within the same area, meant for improving the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the guarantee of the government, or indirectly to them through the state governments.
• Loans given for slum improvement schemes to be implemented by slum clearance boards and other public agencies.
• Lending to builders for construction of residential dwelling units.

The central bank has proposed that housing financiers which don’t fulfill this criteria will be classified as NBFC-investment and credit companies and will be required to approach it for conversion of their certificate of registration. However, a phased timeline will be given to the housing lenders which don’t currently fulfill the qualifying assets criteria, but wish to.

Housing financiers will also not be allowed to apply any foreclosure charges or prepayment penalty for floating rate loans, just like NBFCs, as per the draft guidelines.

Classification Of Housing Lenders

The RBI at present classifies NBFCs as systemically important and systemically non-important based on their asset size. This allows the regulator to come up with norms which can adequately address sectoral problems.

In case of housing financiers too, the regulator has proposed that non-deposit taking housing lenders with asset size of over Rs 500 crore and all deposit taking housing financiers shall be classified as systemically important. Housing lenders which don’t accept deposits and have an asset size of less than Rs 500 crore will be classified as non-systemically important.

The RBI has proposed that it will harmonise the regulations for non-systemically important housing lenders with non-systemically important NBFCs.

Parity In Liquidity, Capital Adequacy Norms

Currently, the RBI requires NBFCs with asset size of Rs 100 crore and above to follow a liquidity management framework, according to which they must have adequate liquidity to cover for any short-term mismatches. This includes granular maturity buckets and tolerance limits, liquidity monitoring tools, adoption of stock approach toward liquidity and introduction of a liquidity coverage ratio.

The regulator has proposed to extend these norms to housing financiers with asset size of Rs 100 crore and above.

• It will be the responsibility of the board to ensure that the guidelines are adhered to.
• The internal controls required to be put in place by housing lenders as per these guidelines shall be subject to supervisory review.
• As a matter of prudence, all other housing financiers will be encouraged to adopt these guidelines on liquidity risk management on voluntary basis.

In case of capital norms, the RBI has proposed that perpetual debt instruments issued by housing lenders will be classified under Tier I and Tier II capital, as they’re for NBFCs. However, this will apply only to non-deposit taking systemically important housing finance companies.

Other areas where the regulator has proposed greater parity between housing financiers and NBFCs include:

• Group entities engaged in real estate business.
• Monitoring of frauds.
• Information technology framework.
• Securitisation.
• Lending against shares.
• Managing risks and code of conduct in outsourcing of financial services.
• Implementation of Indian Accounting Standards.

The RBI noted that certain major areas exist where there’s considerable difference in guidelines issued for NBFCs and housing lenders, which the regulator intends to harmonise in two to three years. These are instances where norms for housing lenders are tighter than those for NBFCs.

This includes capital adequacy norms where housing financiers must have a minimum capital adequacy ratio of 12%, which will be gradually raised to 15% by March 31, 2022. Similarly, in case of risk weightage, housing lenders assign weightages ranging between 30-125%, depending on the type of loan. The RBI noted that in case of NBFCs, the norms are less diversified.

Similarly, there are major differences in provisioning norms applicable to standard, substandard and doubtful assets in the books of housing financiers. The credit concentration norms for NBFCs and housing lenders are similar, however, NBFCs enjoy certain exceptions in this regard, the central bank said.

The RBI has sought public comments on the draft guidelines by July 15, after which, it will consider coming up with final guidelines for governing housing financiers.