RBI directs HFCs to lend at least 60% of their loans to the housing sector

[ecis2016.org] While directing HFCs to lend at least 60% of their loans to the housing sector, the RBI has also asked HFCs and NBFCs to deploy at least half of their total loans to the housing sector to individuals

In what might result in fresh flow of liquidity to India’s cash-starved real estate sector, the Reserve Bank of India (RBI), on October 22, 2020, made changes in the regulatory framework for housing finance companies (HFCs). Through the final guidelines issued on October 22, which is a follow-up of a draft issued in June 2020, the apex bank has directed HFCs to lend at least 60% of their net assets for housing. The RBI has also mandated those HFCs and non-banking financiers, which are not currently lending that much portion of their total loans to housing, to reach that level by March 2024.

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This, the RBI said, should be done in a phased manner, by utilising 50% of the books by March 31, 2022, 55% by March 31, 2023, and 60% by March 31, 2024. The central bank has further directed HFCs and non-banking finance companies (NBFCs) to deploy at least half of their total loans to the housing sector, to individuals.

“Such HFCs shall be required to submit to the Reserve Bank, a board-approved plan within three months, including a roadmap to fulfil the above-mentioned criteria and timeline for transition,” the final guidelines read.

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Net assets deployed for housing loans by HFCs

Source: RBI

The guidelines also prohibit HFCs and NBFCs from charging any prepayment or foreclosure fee, on home loans linked with the floating rate of interest. Before the RBI took over as the regulator of HFCs and NBFCs in August 2019, these entities were regulated by the National Housing Board (NHB). As a result of this, there was a wide difference between the lending patterns of banks and HFCs/NBFCs.

What qualifies to be a home loan?

The RBI has also clarified that loans deployed towards any purpose other than buying or construction of a new dwelling unit or renovation of the existing dwelling unit, will be treated as non-housing loans and will not fall under the definition of housing finance.

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Housing finance, the RBI says, includes:

• Loans to individuals or group of individuals, including co-operative societies, for the construction/ purchase of new dwelling units.
• Loans to individuals or group of individuals, for the purchase of old dwelling units.
• Loans to individuals or group of individuals for purchasing old/ new dwelling units, by mortgaging existing dwelling units.
• Loans to individuals for the purchase of plots for construction of residential dwelling units, provided a declaration is obtained from the borrower that he intends to construct a house on the plot within a period of three years from the date of availing of the loan.
• Loans to individuals or group of individuals, for renovation/reconstruction of existing dwelling units.

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• Lending to public agencies, including state housing boards, for the construction of residential dwelling units.
• Loans to corporates/ government agencies, for employee housing.
• Loans for the construction of educational, health, social, cultural or other institutions/centres, which are part of housing projects and which are necessary for the development of settlements or townships.
• Loans for construction meant for improving the conditions in slum areas, for which credit may be extended directly to the slum-dwellers on the guarantee of the central 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 the construction of residential dwelling units.

Exposure of HFCs to real estate builders

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 RBI notification 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% of owned fund for a single entity in the group and 25% of owned fund for all such group entities. The HFC would, in all such cases, follow ‘arm’s length principles’ in letter and spirit,” it said.

Liquidity coverage ratio (LCR) norms

The RBI has mandated that HFCs should maintain a liquidity buffer in terms of LCR, ‘which will promote resilience of HFCs to potential liquidity disruptions, by ensuring that they have sufficient funds to survive any acute liquidity stress scenario lasting for 30 days’. LCR is the proportion of liquid assets set aside by banks, in order to meet short-term obligations.

Timeline and ratio norms on LCR

All non-deposit-taking HFCs with asset size of Rs 10,000 crores and above, and all deposit-taking HFCs, irrespective of their asset size:

All non-deposit-taking HFCs with asset size of Rs 5,000 crores and above, but less than Rs 10,000 crores, with the timeline as:

Source: RBI

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While stating that the minimum net-owned fund should be Rs 20 crores, for a company to start operations as an HFC, the notification also said HFCs unable to meet these guidelines within the fixed timelines, will disqualify as HFCs and will be treated as NBFC-Investment and Credit Companies (NBFC-ICC). They will have to approach the RBI to get a conversion certificate to the same effect, subsequently.

Banks can restructure loans of builders on project basis, says RBI

The RBI has allowed lenders to restructure loans taken by developers at the project-level during the current financial year, if the debt was categorised as standard and not overdue as on March 1, 2020

October 16, 2020: In a move that would benefit the country’s cash-starved real estate developers and delay-affected home buyers, the Reserve Bank of India (RBI) has said that banks should restructure the loans of real estate firms at the project level rather than developer level.

This means that default at the corporate level, will not impact loan restructuring for a builder. Since each real estate project will have its own set of risks, the RBI, while providing answers to several frequently asked questions on the resolution framework for COVID-19-related stressed assets, announced in August 2020, has directed banks to evaluate risks associated with each project separately and take a call on loan restructuring based on that.

However, the project must fulfill certain basic requirements to be eligible for restructuring.  The banking regulator clarified that lenders can restructure loans taken by a developer during the current financial year, if the debt was categorised as standard and not overdue, as on March 1, 2020. This means financial institutions can restructure loans of only those developers who were regular in their loan repayments as on March 1, 2020 and did not have over 30 days of overdue. This also means that housing projects where defaults were made before the Coronavirus period, will not be able to benefit under the COVID-19 stress fund.

“Only in respect of borrowers belonging to the real estate sector and have both residential and commercial real estate business, the prescribed thresholds for the financial parameters may be applied at the project level,” the RBI said.

These provisions, while offering lenders flexibility in loan restructuring, will enable construction work to start on housing projects that have been hit by the Coronavirus impact on real estate. Since individual housing projects are considered separate legal entities, the performance or defaults at the corporate level will not result in them losing out on the loan restructuring benefits.

Owing to loan defaults at the company level, banks were, so far, unable to fund even net-worth positive projects that have been stuck, because of the last-mile liquidity issues. It, however, remains to be seen how each lender carries this plan forward.

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