Key Takeaways: Understanding Housing Finance Companies (HFC) Transfer of Regulation of HFCs from National Housing Bank to RBI RBI's Proposed Regulations for HFCs Major differences between NBFC and Extant HFC Regulations

1. RBI’s Proposed Regulations for Housing
Finance Companies
CA Divakar Vijayasarathy

2. Research Credits
Sundar Rajan S
CA Jugal Narendra Gala

3. Legends Used in the Presentation
BV Book Value
CG Central Government
CRAR Capital-to-risk Weighted Assets Ratio
HFC Housing Finance Companies
LCR Liquidity Coverage Ratio
MD Master Directions
MD-NBFC-SI MD – NBFC – Systemically Important Non Deposit Taking Company and Deposit Taking
Company (Reserve Bank) Directions, 2016
NBFC Non-Banking Financial Companies
NHB National Housing Bank
NOF Net Owned Fund
O/s Outstanding
RBI Reserve Bank of India
Sec Section
SG State Government

4. Presentation Schema
Housing Finance
Company – Pre-RBI
Governance
Transfer of Regulation
of HFC to RBI
RBI’s Proposed
Changes for HFCs
Definitions and NOF
Requirement
Systemically and Non-
systemically Important
HFCs
Major Differences
between NBFC and
Extant HFC Regulations
Statistics Way Forward

5. Overview
Housing Finance Companies (HFCs) are a type of non-banking financial institutions that primarily deals in
financing housing loans
HFC was completely regulated by National Housing Bank (Statutory body) till August 09,2019
Some of the notable players in housing finance are HDFC Housing Finance, LIC Housing Finance,
Indiabulls Housing Finance, etc.
On account of irregularities being faced in the housing finance sector, it was felt by CG that there is
a need to transfer the regulation of HFC from NHB to RBI
On account of this, CG in its Finance Act, 2019 (No.2) had, inter alia, amended the provisions of Sec 29A
of the NHB Act, 1987 by replacing the significant powers vested in NHB with RBI

6. Transfer of Regulation of HFC to RBI
The Finance Act, 2019 (No.2) has amended the National Housing Bank Act, 1987 conferring certain powers
for regulation of HFCs with RBI
CG vide its notification dated August 09, 2019 appointed the same date (09-08-2019) as the date on which
the transfer of regulation of HFC to RBI shall come into effect
Apropos to the above notification, RBI vide its press release dated August 13, 2019 stated the following:
•HFCs will be treated as one of the categories of NBFCs for regulatory purposes
•RBI will carry out a review of the extant regulatory framework applicable to the HFCs and come out with revised
regulations in due course
•In the meantime, HFCs shall continue to comply with the directions and instructions issued by the NHB till the RBI
issues a revised framework
•NHB will continue to carry out supervision of HFCs and HFCs will continue to submit various returns to NHB as before
•The grievance redressal mechanism with regard to HFCs will also continue to be with the NHB
A housing finance institution, which is a company, desirous of making an application for registration under
Sec 29A of the National Housing Bank Act, 1987, may approach the Department of Non-Banking
Regulation, RBI

7. RBI’s Proposed Changes for HFCs

8. Summary of the Proposed Changes
Defining ‘providing finance for housing’ or
‘housing finance’ & principal business and
qualifying assets for HFCs
Increasing the minimum net owned fund
requirement, amending Tier I and Tier II
Capital definitions and addressing the
issue of double financing
Classifying HFCs as systemically important
(asset size of ₹500 crore & above) and non-
systemically important (asset size less than
₹500 crore); and
Reserve Bank’s directions on Liquidity Risk
framework, LCR, securitisation, etc., for
NBFCs, to be made applicable to HFCs
 RBI has reviewed the extant regulatory framework and has identified a few changes which are
proposed to be prescribed for HFCs
Summary of the proposed changes made by RBI are as follows:

9. Applicable Law for the
Regulation of HFCs

10. Re-introducing Dual Regulation
In order to avoid dual regulation, HFCs were granted exemption from the provisions of Chapter IIIB
of the RBI Act, 1934 vide notification dated June 18, 1997 by exercising powers under Section 45NC
of RBI Act, 1934
With the transfer of regulation of HFCs to RBI, it was decided to withdraw these exemptions and
make the provisions of Chapter IIIB except Sec 45-IA of RBI Act applicable to all HFCs (since Sec
45-IA deals with registration of an NBFC and this is taken care under Sec 29A of NHB Act, 1987)
RBI vide its Gazette Notification dated November 19, 2019 had withdrawn the exemptions granted
to HFCs
Companies intending to function as HFCs shall seek registration with RBI under Sec 29A of NHB
Act, 1987 and existing HFCs holding Certificate of Registration issued by NHB need not approach
RBI for fresh Certificate of Registration

11. Providing Definitions to
Certain Terms

12. ‘Providing Finance for Housing’ or ‘Housing
Finance’
 RBI proposed to have an inclusive definition of the terms ‘providing finance for housing’ or ‘housing finance’
 Housing Finance” or “providing finance for housing” means financing for purchase/ construction/
reconstruction/ renovation/ repairs of residential dwelling units, which includes the following:
1. Loans to individuals or group of individuals including co-operative societies for construction/ purchase of
new dwelling units
2. Loans to individuals for purchase of old dwelling units
3. Loans to individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units
4. Loans to individuals for 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
5. Loans to individuals for renovation/ reconstruction of existing dwelling units
6. Lending to public agencies including state housing boards for construction of residential dwelling units

13. Contd.
7. Loans to corporates/ Government agencies (through loans for employee housing)
8. Loans for construction of educational, health, social, cultural or other institutions/centres, which
are part of housing project in the same complex and which are necessary for the development of
settlements or townships
9. 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 SGs
10. Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and
other public agencies
11. Lending to builders for construction of residential dwelling units
All other loans including those given for furnishing dwelling units, loans given against mortgage of property for
any purpose other than buying/ construction of a new dwelling unit/s or renovation of the existing dwelling
unit/s, will be treated as non-housing loans

14. Principal Business and Qualifying Assets
• As per Sec 29A of NHB Act, 1987, no HFC shall commence housing finance as its principal
business unless
• A certificate of registration is obtained from RBI; and
• Has a net owned fund (discussed in subsequent slides) of ₹ 10 crores* or such other higher
amount, as the RBI may, by notification, specify
Sec 29A of
NHB Act,
1987
• At least 50% of the net assets of the HFC are in the nature of qualifying assets; and
• At least 75% of such qualifying assets should be towards individual housing loans (as defined in
points 1 to 5 under “housing finance” in Slide No. 12)
• Earlier, HFCs were recognised if one of their principal objects was providing finance to housing
(directly or indirectly)
Principal
business
• It refers to ‘housing finance’ or ‘providing finance for housing’ (as defined in previous slides)
Qualifying
assets
• It means total assets other than cash and bank balances and money market instrumentsNet assets
*Net owned fund requirement is now proposed to be increased to ₹ 20 Crores by RBI

15. Contd.
Such HFCs which do not fulfil the principal business criteria will be treated as NBFC – Investment
and Credit Companies (NBFC-ICCs) and will be required to approach RBI for conversion of their
Certificate of Registration from HFCs to NBFC-ICC
Application for such conversion should be submitted with all supporting documents meant for new
registration together with an auditor’s certificate on Principal Business Criteria (PBC) and necessary
board resolution ratifying the conversion
However, a phased timeline will be given to HFCs which do not currently fulfil the qualifying assets
criteria, but wish to continue as HFCs in future (timeline provided below)
Timeline (Qualifying assets
criteria to be satisfied within
the below mentioned dates)
At least 50% of net assets as
qualifying assets i.e., towards
housing finance
At least 75% of qualifying assets
towards housing finance for
individuals
March 31, 2022 50% 60%
March 31, 2023 - 70%
March 31, 2024 - 75%
 NBFC – Investment and Credit Company is a category of NBFC which comprises of 3 types of NBFC
 1. Loan Company; 2. Investment Company; and 3. Asset Finance Company

16. Classification into Systemically and
Non-systemically Important HFCs

17. Systemically and Non-systemically Important
Presently HFC regulations are common for all HFCs irrespective of their asset size and ownership
RBI proposed to issue HFC regulations by classifying them as systemically important and non-
systemically important, in line with the categorisation of other applicable NBFCs
Hence, a non-deposit taking HFCs (HFC-ND) with asset size (total assets) of ₹500 crore & above and all
deposit taking HFCs (HFC-D), irrespective of asset size, will be treated as systemically important HFCs
HFCs with asset size below ₹500 crore will be treated as non-systemically important HFCs (HFC-non-SI)
Regulations for HFC-NDSI & HFC-Ds will be as existing under NHB regulations or harmonised with NBFC
regulations
Regulations for HFC-non-SI (i.e., HFCs with asset size below ₹500 crore) will be brought on par with
relevant regulations for NBFC-ND-non-SI (Master Direction for non-systemically important NBFCs dated
September 01, 2016 and updated up to February 17, 2020)

18. Increase in Net Owned Fund
Requirement

19. NOF Requirement
In exercise of powers conferred under Sec 29A (1) (b) of NHB Act, 1987, RBI proposes to increase the
minimum NOF for HFCs from the current requirement of ₹10 crores to ₹20 crores
For existing HFCs the above requirement shall be attained in the following manner:
• ₹15 crores within 1 year; and
• ₹20 crores within 2 years*
This step is aimed at strengthening the capital base, especially of smaller HFCs and companies
proposing to seek registration under NHB Act
* The date from which the time limit of 1 year and 2 years to be taken are not specified
It can be expected that the same would be provided in the final HFC regulation proposed to be introduced
NOF#
aggregate of the paid-up equity capital and
free reserves as disclosed in the latest
balance-sheet of HFC
• accumulated losses
• deferred revenue expenditure
• other intangible assets
a.
b.
investments of such HFC in shares of
• its subsidiaries;
• companies in the same group;
• all other HFCs
BV of debentures, bonds, o/s loans and advances (including
hire-purchase and lease finance) made to, and deposits with
• subsidiaries of such HFC; and
• companies in the same group, to the extent such amount
exceeds 10% of (a) above
AND
#As per Explanation to Sec 29A of NHB Act, 1987

20. Harmonising Definitions of
Capital (Tier I & Tier II) with
that of NBFCs

21. Tier I and Tier II Capital
Tier I capital
• Tier I capital is the primary funding source of NBFC and it is a NBFC’s highest quality
capital because it is fully available to cover losses
• It generally consists of the owned fund and the perpetual debt instruments (PDIs)
Tier II capital
• Tier II capital is a NBFC’s supplementary capital. The loss absorption capacity of Tier II
capital is lower than that of Tier I capital
• It generally consists of the subordinated debt, revaluation reserves, hybrid debt capital
instruments, PDIs, etc.
Perpetual debt
instrument
• It is a kind of debt instrument with no maturity date

22. Contd.
The components of Tier I and Tier II capital are similar for NBFCs and HFCs except for the treatment of perpetual
debt instruments (PDI)
Presently PDIs are not considered as part of capital of HFCs unlike that of NBFCs
It is proposed to align the definitions of capital (both Tier I and Tier II) of HFCs with that of NBFCs as per Para 3 (xxxii)
and 3 (xxxiii) of MD-NBFC-SI
The changes proposed are as follows:
• Inclusion of PDIs as a component of Tier I and Tier II capital on the lines of NBFCs
• PDIs can be treated as part of Tier I / Tier II capital only by non-deposit taking systemically important HFCs
• PDIs or any other debt capital instrument in the nature of PDIs, already issued by either deposit taking HFCs or
non-systemically important HFCs will be reckoned as Tier I or Tier II capital as the case may be for a period not
exceeding 3 years
• Since HFCs are treated as a category of NBFCs for regulatory purposes, investments in shares of other HFCs and
also in other NBFCs (whether forming part of group or not), shall be reduced from the Tier I capital to the
extent it exceeds, in aggregate along with other exposures to group companies, 10% of the owned fund of HFC

23. Public Deposits & Liquidity Risk
Framework and Liquidity
Coverage Ratio

24. The definition of public deposits as given by NHB under Housing Finance Companies (NHB)
Direction 2010 exempts any amount received from NHB or any public housing agency from the
definition of public deposit
RBI proposes to align the definition of public deposit as given under RBI master direction in
consonance with NHB definition by exempting the amount received by HFCs from NHB or any
public housing agency from the definition of public deposit
Public Deposits

25. Liquidity Risk Framework and Liquidity Coverage
Ratio
RBI proposed to extend the guidelines for NBFC on Liquidity Risk framework and LCR* for non-deposit
taking HFCs with asset size of ₹100 crores & above and all deposit taking HFCs
It will be the responsibility of the Board of Directors to ensure that the guidelines are adhered to
The internal controls required to be put in place by HFCs as per these guidelines shall be subject to
supervisory review
Further, as a matter of prudence, all other HFCs are encouraged to adopt these guidelines on liquidity risk
management on voluntary basis
* LCR is the proportion of high liquid assets (which are easily convertible into cash) set aside to meet
short-term obligations

26. Guidelines on Liquidity Risk Management
Framework
Board of the NBFC shall frame a liquidity risk management framework which ensures that it maintains sufficient
liquidity, including a cushion of unencumbered, high quality liquid assets to withstand a range of stress events,
including those involving the loss or impairment of both unsecured and secured funding sources
Key elements of the liquidity risk management framework include,
• Implementation of strong organisational set up for Liquidity Risk Management (Risk Management Committee,
Asset-Liability Management Committee, Asset Liability Management Support Group, etc.)
• Having a sound process for identifying, measuring, monitoring and controlling liquidity risk (Liquidity risk
Tolerance)
• Having a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-
balance sheet items over an appropriate set of time horizons
• Establishing a funding strategy that provides effective diversification in the sources and tenor of funding
• Actively managing the collateral positions, differentiating between encumbered and unencumbered assets
• Conducting stress tests on a regular basis for a variety of short-term and protracted NBFC-specific and market-
wide stress scenarios (individually and in combination)
• Publicly disclosing information on a quarterly basis on the official website of the company and in the annual
financial statement as notes to account that enables market participants to make an informed judgment about
the soundness of the liquidity risk management framework and liquidity position

27. Guidelines on Liquidity Coverage Ratio
LCR = Stock of High Quality Liquid Assets / Total Net Cash Outflows over the next 30 calendar days
Minimum LCR to be maintained by all non-deposit taking NBFCs with asset size of ₹ 10,000 crore and
above and all deposit taking NBFCs irrespective of the asset size from December 1, 2020 is 50%
progressively increasing, till it reaches the required level of 100%, by December 1, 2024
Non-deposit taking NBFCs with asset size of ₹ 5,000 crore and above but less than ₹ 10,000 crore
shall also maintain a minimum LCR of 30% from December 1, 2020, progressively increasing, till it
reaches the required level of 100%, by December 1, 2024
LCR shall continue to be minimum 100% on an ongoing basis with effect from December 1, 2024
 Assets are considered to be high quality liquid assets if they can be easily and immediately converted into
cash at little or no loss of value
• E.g. Cash, Government securities, etc.
 Total net cash outflows is defined as the total expected cash outflows minus total expected cash inflows
for the subsequent 30 calendar days

28. Group Entities Engaged in Real
Estate Business

29. Addressing Double Financing
In order to address concerns on double financing due to lending to construction companies
in the group and also to individuals purchasing flats from the latter, the HFC concerned may
choose to lend only at one level
That is, the HFC can either undertake an exposure on the group company in real estate
business or lend to retail individual home buyers in the projects of group entities, but not
do both
If the HFC decides to take any exposure in its group entities (lending and investment) directly
or indirectly, such exposure 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
As regards extending loans to individuals, who choose to buy housing units from entities in
the group, the HFC would follow arm’s length principles in letter and spirit
Aggregate of,
• paid-up equity capital,
• CCPS,
• free reserves,
• balance in share premium account and
• capital reserves (realisable in cash)
• accumulated losses
• deferred revenue expenditure
• other intangible assets
Owned Fund

30. Monitoring of Frauds and Information
Technology Framework

31. Monitoring of Frauds
All instructions to NBFCs with regard to monitoring of frauds is covered in the Master Direction -
Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016
These directions cover various aspects pertaining to classification of frauds, monitoring of
frauds and reporting to the Board, to the police authorities, RBI, etc.
With a view to harmonizing all instructions pertaining to fraud monitoring, it is proposed to
make these directions applicable to HFCs in place of present guidelines issued by NHB
All reports in the formats given in these Master Directions of Monitoring of Frauds may however
continue to be forwarded to NHB, New Delhi as being done before

32. Master Directions – Monitoring of Frauds in
NBFCs (Reserve Bank) Directions, 2016
Classification of frauds based on provisions of IPC
• Misappropriation and criminal breach of trust
• Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious
accounts and conversion of property
• Unauthorised credit facilities extended for reward or for illegal gratification
• Negligence and cash shortages (Reporting of fraud to be done if the intention to defraud is proved – However, if
the cash shortages are more than Rs.10,000 and Rs.5000 (if detected by management/auditor/officer) reporting is
to be done even if the intention of fraud is not suspected/proved at the time of detection
• Cheating and forgery
• Irregularities in foreign exchange transactions (Reporting of fraud to be done if the intention to defraud is proved )
Reporting of frauds to RBI (Fraud reports are to be submitted in all cases of fraud of Rs.1 lakh and above –exceptions
discussed above)
• If amount involved in fraud < 1 crore – Report in prescribed form to Regional Office of the Department of Non-
banking Supervision of the Bank within 21 days
• If amount involved in fraud > 1 crore – Report in prescribed form to Central Fraud Monitoring Cell and Regional
Office of the Department of Non-banking Supervision of the Bank within 3 weeks [In addition, the fraud has to be
reported by means of a D.O. letter to Chief GM-in-charge of Banking Supervision (RBI - Fraud Monitoring Cell) and a
copy to be endorsed to Chief GM-in-charge of Non-Banking Supervision, RBI, Central Office within a week]
• All individual cases involving ₹ 25 lakh or more should be continued to be placed before the Audit Committee of
applicable NBFC’s Board

33. Contd…
Quarterly Returns
• Applicable NBFCs should submit a copy of the Quarterly Report on Frauds Outstanding in the prescribed form to
the Regional Office of the Bank , Department of Non-Banking Supervision under whose jurisdiction the Registered
Office of the NBFC falls irrespective of amount within 15 days of the end of the quarter to which it relates
• Also, case-wise quarterly progress reports on frauds involving Rs.1 lakh and above to the respective authorities
depending on amount more than or less than Rs.1 crore (as discussed before) within 15 days from the end of the
quarter to which it relates
Review of frauds
• All the frauds involving an amount of ₹ 1 crore and above should be monitored and reviewed by the Audit
Committee of the Board (ACB) of NBFCs
• Applicable NBFCs should conduct an annual review of the frauds and place a note before the Board of Directors for
information. The reviews for the year-ended December should be put up to the Board before the end of March the
following year (Such reviews need not be sent to the Bank)
Cases that should be invariably be referred to the State Police:
• Cases of fraud involving an amount of ₹ 1 lakh and above, committed by outsiders on their own and/or with the
connivance of applicable NBFCs staff/officers
• Cases of fraud committed by employees of applicable NBFCs, when it involves the NBFC funds exceeding ₹
10,000/-

34. Information Technology Framework
Information Technology (IT) Framework for NBFCs issued vide Master Directions dated June 8,
2017 is proposed to be made applicable to HFCs and consequently the guidelines issued by NHB is
proposed to be withdrawn
The IT framework covers IT Governance, IT Policy, Information & Cyber Security, IT Operations, IS
Audit, Business Continuity Planning and IT Services Outsourcing
The directions are categorized into two parts, those which are applicable to all NBFCs with asset
size above ₹500 crores (considered Systemically Important) are provided in Section-A of above
mentioned master directions
Directions for NBFCs with asset size below ₹500 crores are provided in Section-B of the above
mentioned master directions
In view of the decision to classify the HFCs into systemically important and non-systemically
important entities these instructions will apply accordingly

35. Master Directions – Information Technology
Framework for the NBFC Sector
The directions are categorized into two parts, those which are applicable to all NBFCs with asset size above ₹ 500
crore (Considered Systemically Important) are provided in Section-A. Directions for NBFCs with asset size below ₹
500 crore are provided in Section-B
IT Governance
• Effective IT Governance is the responsibility of the Board of Directors and Executive Management
• The basic principles of value delivery, IT Risk Management, IT resource management and performance
management must form the basis of governance framework
• NBFCs are required to form an IT Strategy Committee. The chairman of the committee shall be an independent
director and Chief Information Officer & Chief Technology Officer should be a part of the committee
• The Committee should carry out review and amend the IT strategies in line with the corporate strategies, Board
Policy reviews, cyber security arrangements and any other matter related to IT Governance. Its deliberations
may be placed before the Board
IT Policy
• The Information Security (IS) policy should provide for a IS Framework with the tenets such as Identification and
Classification of Information Assets, Segregation of functions, Role based Access Control, Personnel Security,
Physical Security, Maker-checker, Incident Management, Trails and Public Key Infrastructure(PKI)
• IS framework should also provide for Cyber security policy and cyber crisis management plan, IT risk assessment
and a proper mechanism for safeguarding financial assets that are being used by mobile applications
Section-A

36. Contd…
IT Operations
• IT Operations should support processing and storage of information, such that the required information is
available in a timely, reliable, secure and resilient manner
• The Board or Senior Management should take into consideration the risk associated with existing and planned IT
operations and the risk tolerance and then establish and monitor policies for risk management
• Proper mechanisms has to be devised to develop and maintain IS(New Application Software) and Change
Management and an IT enabled Management Information System
IS Audit
• IS Audit should form an integral part of Internal Audit system of the NBFC, in order to identify risks and methods
to mitigate risk arising out of IT infrastructure
• The periodicity of IS audit should ideally be based on the size and operations of the NBFC but may be conducted
at least once in a year
• Computer-Assisted Audit Techniques (CAATs) may be used in critical areas (such as detection of revenue
leakage, treasury functions, assessing impact of control weaknesses, monitoring customer transactions under
AML requirements and generally in areas where a large volume of transactions are reported) particularly for
critical functions or processes having financial/regulatory/legal implications
IT Services Outsourcing
• Prior to commencement of any outsourcing arrangement, careful consideration of risks, threats of contractual
arrangements and regulatory compliance obligations must take place
• The contractual agreement may include clauses to allow the Reserve Bank of India or persons authorized by it
to access the NBFC’s documents, records of transactions, and other necessary information given to, stored or
processed by the service provider within a reasonable time

37. Contd…
It is recommended that smaller NBFCs may start with developing basic IT systems mainly for maintaining the
database. NBFCs having asset size below ₹ 500 crore shall have a Board approved Information Technology
policy/Information system policy
The IT systems shall have:
• Basic security aspects such as physical/ logical access controls and well defined password policy;
• A well-defined user role;
• A Maker-checker concept to reduce the risk of error and misuse and to ensure reliability of data/information;
• Information Security and Cyber Security;
• Requirements as regards Mobile Financial Services, Social Media and Digital Signature Certificates as applicable
in for NBFCs having assets size above Rs.500 crore
• System generated reports for Top Management summarising financial position including operating and non-
operating revenues and expenses, cost benefit analysis of segments/verticals, cost of funds, etc.;
• Adequacy to file regulatory returns to RBI
• A Business continuity planning and disaster recovery policy duly approved by the Board ensuring regular
oversight of the Board by way of periodic reports (at least once every year);
• Arrangement for backup of data with periodic testing
Section-B

38. Other Proposed Changes

39. Securitization
NHB has not prescribed specific guidelines on securitisation
It is proposed to bring all HFCs under the ambit of guidelines on securitisation transaction as applicable to NBFCs
contained in Annex XXII to MD – NBFC – SI

40. Guidelines on Securitisation Transaction
Assets eligible
for Securitisation
Minimum Holding
Period (MHP)
Minimum Retention
Requirement (MRR)
Limit on Total Retained
Exposures
Booking of Profit
Upfront
Disclosures by the
Originating NBFCs
Loan Origination
Standards
Treatment of
Securitised Assets not
Meeting the Stipulated
Requirements
Standards for
Due Diligence
Stress Testing Credit Monitoring
Treatment of
Exposures not Meeting
the Stipulated
Requirements
Requirements
to be met by
the Originating
(without
support of any
banks) HFCs
Requirements
to be met by
HFCs other
than originators
having
Securitisation
exposure
Guidelines on Securitisation of Standard AssetsSection-A

41. Contd.
Assets Eligible for
Transfer
Minimum Holding
Period (MHP)
Minimum Retention
Requirement (MRR)
Booking of Profit
Upfront
Disclosures by the
Originating NBFCs
Loan Origination
Standards
Treatment of Assets sold
not Meeting the
stipulated Requirements
Restrictions on
Purchase of loans
Standards for
Due Diligence
Stress Testing Credit monitoring
True Sale
Criteria
Representations and
Warranties
Re-purchase of
Assets
Applicability of Capital
Adequacy and other
Prudential Norms
Treatment of Exposures
not Meeting the
Stipulated Requirements
Re-securitisation
of Assets
Synthetic
Securitisations
Securitisation with Revolving
Structures (with or without early
amortisation features)
Requirements to
be met by the
Originating HFCs
Requirements to
be met by the
Purchasing HFCs
Guidelines on Transactions Involving Transfer of Assets through Direct
Assignment of Cash Flows and the Underlying Securities
Section-B
Securitisation Activities /
Exposures not permittedSection-C

42. Lending against Shares
Currently, there are no guidelines in place for lending against the security of shares by HFCs
For the sake of uniformity, it is proposed to extend instructions applicable to NBFCs to lend against
the collateral of listed shares contained in para 22 of the MD – NBFC – SI to all HFCs as follows:-
Applicable HFC lending
against the collateral of
listed shares shall,
(i) maintain a Loan to Value (LTV) ratio of 50% for
loans granted against the collateral of shares. LTV
ratio of 50% shall be maintained at all times. Any
shortfall in the maintenance of the 50% LTV
occurring on account of movement in the share
prices shall be made good within 7 working days.
(ii) in case where lending is being done for
investment in capital markets, accept only
Group 1 securities (specified in SMD/ Policy/
Cir - 9/ 2003 dated March 11, 2003 as
amended from time to time, issued by SEBI)
as collateral for loans of value more than ₹ 5
lakh, subject to review by the Bank.
(iii) report on-line to stock
exchanges on a quarterly basis,
information on the shares pledged
in their favour, by borrowers for
availing loans in prescribed format.

43. Outsourcing of Financial Services
As no guidelines have been prescribed for HFCs with regard to outsourcing of Financial Services, it
is proposed to extend the guidelines issued vide Annex XXV to the MD – NBFC – SI to all HFCs as
follows:-
As per the guidelines HFCs shall not outsource
core management functions including Strategic
and Compliance and decision-making functions
An HFC intending to outsource any of its financial
activities shall put in place a comprehensive
outsourcing policy
The service provider, if not a group company of
the HFC, shall not be owned or controlled by any
director of the HFC or their relatives
The Board and Senior Management of HFC shall
play a crucial role in approving and reviewing
outsourcing strategies and deciding on activities
that are material.
The HFC should guard against strategic risk, exit-
policy risk, legal and operational risk, contractual
risk and systemic risk while outsourcing.
Materiality of outsourcing function is
assessed based on the following:
The level of importance to the HFC of the activity
being outsourced as well as the significance of the
risk posed by the same
The potential impact of the outsourcing on the
HFC on various parameters such as earnings,
solvency, liquidity, funding capital and risk profile
The likely impact on the HFC’s reputation and
brand & objective
The cost of the outsourcing as a proportion of total
operating costs of the HFC
The aggregate exposure to that particular service
provider, in cases where the HFC outsources
various functions to the same service provider and
The significance of activities outsourced in context
of customer service and protection
Key Guidelines governing Outsourcing

44. Foreclosure Charges
As a measure of customer
protection and also in order to
bring in uniformity with
regard to repayment of
various loans by borrowers of
banks and NBFCs,
no foreclosure charges / pre-
payment penalties shall be levied
on any floating rate term loan
sanctioned for purposes other than
business to individual borrowers
with or without co-obligants
Since similar regulations are
currently not prescribed for
HFCs, it is proposed to extend
these instructions to HFCs
Implementation of Indian Accounting Standards
Instructions issued to NBFCs vide circular dated March 13, 2020 on Implementation of Indian Accounting
Standards will be extended to HFCs
Prudential floor for Expected Credit Loss (ECL) will be based on the extant instruction on provisioning
applicable to HFCs

45. Comparison between Existing Regulations for
HFCs and the Proposed Regulations by RBI
Regulation Existing (as provided by NHB) Proposed by RBI
Liquidity Risk framework and
LCR
Guideline for Asset Liability
Management System issued by NHB
via Policy Circular No. 35 dated 11th
October, 2011
Guidelines on Liquidity Risk Management
Framework for NBFCs dated November 4,
2019
Monitoring of frauds Guidelines on Monitoring of frauds
dated February 5, 2019
MD - Monitoring of Frauds in NBFCs
(Reserve Bank) Directions, 2016 is
applicable
Information Technology
Framework
Guidelines on Information Technology
Framework for HFCs dated June 15,
2018
MD on Information Technology
Framework for the NBFC Sector is
applicable
Securitization No guidelines prescribed Guidelines prescribed under MD – NBFC –
SI are applicable
Lending against Shares No guidelines prescribed Guidelines prescribed under MD – NBFC –
SI are applicable
Managing Risks and Code of
Conduct in Outsourcing of
Financial Services
No guidelines prescribed Guidelines prescribed under MD – NBFC –
SI are applicable

46. Major Differences between NBFC
and Extant HFC Regulations

47. 1. Capital Adequacy Ratio
• Minimum CRAR prescribed for HFCs currently is 12% and which will be
progressively increased to 14% by March 31, 2021 and to 15% by March 31, 2022
• Further, the risk weights for assets of HFCs are in the range of 30% to 125% based on
asset classification, type of borrower, etc.
• However, for NBFCs, the minimum CRAR is 15% and risk weights are broadly under
0%, 20% and 100% categories
Capital
requirements
 Capital adequacy ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect
depositors and promote the stability and efficiency of financial systems
 CRAR is calculated by dividing the NBFC’s capital by its risk-weighted assets
 Risk-weighted assets are used to determine the minimum amount of capital that must be held by the
NBFC to reduce the risk of insolvency
 Generally, a NBFC with a high capital adequacy ratio is considered safe and likely to meet its financial
obligations
 CRAR = (Tier 1 Capital + Tier 2 capital) / Risk weighted assets
• Harmonising the regulations (mentioned in this sub-topic) will be carried out in a phased
manner over a period of two to three years
• Until such time, HFCs will continue to follow the extant norms
Major Differences

48. 2. Income Recognition, Asset Classification and
Provisioning (IRACP) Norms
 There are major differences in provisioning norms applicable to standard, substandard and doubtful
assets in HFCs' books (In case of standard loans, the HFCs are required to create a provision ranging
from 0.4% to 2% and for substandard the requirement is 15%, for doubtful, the requirement is 25% to
100%)
3. Norms on Concentration of Credit / Investment
• The credit concentration norms for NBFCs and HFCs are similar
• However, NBFCs enjoy certain exceptions in this regard
4. Limits on Exposure to Commercial Real
Estate (CRE) & Capital Market (CME)
 Limits prescribed for HFCs for exposure to,
a. CRE by way of investment in land & building shall not be more than 20% of capital fund and
b. CME shall not be more than 40% of net worth total exposure of which direct exposure should
be 20% of net worth
 No limits prescribed for NBFCs

49. 5. Regulations on Acceptance of Public Deposits
Some of the differences in the regulations pertaining to public deposits are as follows
• 12 months to 120 months for HFCs
• 12 months to 60 months for NBFCsPeriod of public
deposit
• 3 times of NOF for HFCs
• 1.5 times for NBFCs with minimum investment grade
rating
Ceiling on quantum of
deposit
• Ranging from 1% to 4% below prescribed rate for HFCs
• 2% to 3% below prescribed rate for NBFCs depending
upon duration and prescription of rate
Interest on premature
repayment of deposits
• 13% for HFCs
• 15% for NBFCsMaintenance of liquid
assets

50. Statistics

51. List of HFCs
17
83
0
10
20
30
40
50
60
70
80
90
Deposit taking Non-deposit taking
Number of HFCs granted Certificate of
Registration
Source: NHB portal

52. List of NBFCs
69
278
9124
No. of NBFCs (As at 29th February, 2020)
Deposit taking
Non Deposit-
Systemically
Important
Non Deposit - Non
Systemically
Important
Source: RBI portal

53. Conclusion
Tighter regulatory norms and expected increase in transparency may attract more investors in the
housing finance sector over a period of time
With tighter norms and regular monitoring by RBI, frauds or scams in HFCs can be avoided or
mitigated
However, dual regulation by NHB and RBI on HFCs might be challenging and burdensome with
respect to statutory compliances by HFCs

54. Thank You!
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