Housing Finance

A housing finance company ("HFC") is another form of a non-banking financial company ("NBFC") which
primarily is engaged in the business of providing finance for housing. With the growth of major HFCs in
India providing housing loans to home buyers, the housing finance sector has experienced
unprecedented growth from being a government provided service to private players entering the
housing finance market to provide such services.

The provisions for the regulation of HFCs are provided under the National Housing Bank Act, 1987 ("NHB
Act") with the National Housing Bank ("NHB") being the regulatory authority for HFCs. In order to avoid
dual regulation, certain exemptions were granted to HFCs from the provisions of Chapter IIIB (Provisions
relating to Non-Banking Institutions receiving Deposits and Financial Institutions) of the Reserve Bank of
India Act, 1934 ("RBI Act") vide notification dated 18 June 1997.

In 2019, the NHB Act was amended and certain powers for regulation of HFCs were conferred with the
Reserve Bank of India ("RBI") pursuant to such amendments. As a result thereof, the exemptions
granted to HFCs under the RBI Act were withdrawn and the provisions of Chapter IIIB (except Section
45-IA (Requirement of Registration and Net Owned Fund)) of the RBI Act were made applicable to all
HFCs vide a notification dated 19 November 2019 issued by the RBI. On 18 November 2020, the RBI
issued another notification (which supersedes earlier notification dated 19 November 2019) to exempt
HFCs from the provisions of Sections 45-IA (Requirement of Registration and Net Owned Fund), 45-IB
(Maintenance of Percentage of Assets) and 45-IC (Reserve Fund).

The RBI undertook a review of the regulations applicable to the HFCs and proposed certain changes in
the regulatory framework for HFCs. On 17 June 2020, the RBI issued a draft framework and invited
public comments thereon.

Revised Regulatory Framework for HFCs

On 22 October 2020, the RBI issued the revised regulatory framework ("Revised Framework")1 for HFCs.
Set out below are the key aspects of the Revised Framework:

Definition of HFC

Under the Revised Framework, a HFC has been defined to mean a non-banking financial company
engaged in the housing finance business and which fulfils the following conditions:

(a) Its financial assets (in the business of providing finance for housing) constitute not less than 60% of
its total assets; and

(b) Out of the total assets (netted off by intangible assets), not less than 50% should be by way of
housing financing for individuals.

Transition time for existing HFCs to fulfil the asset based criteria

The Revised Framework has allowed a transition time till 31 March 2024 to the existing registered HFCs
to fulfil the asset based criteria as set out above in case such HFCs proposed to continue the business as
HFCs:
 Minimum percentage of total assets Minimum percentage of total assets towards
Timeline
towards housing finance housing finance for individuals

31 March
50% 40%
2022

31 March
55% 45%
2023

31 March
60% 50%
2024

The existing HFCs, which do not fulfil the assets based criteria, would need to submit to the RBI a Board
approved plan within 3 (three) months including a roadmap to fulfil the above-mentioned criteria and
timeline for transition. In case a HFC is unable to fulfil the above criteria as per the timeline, such HFC
shall be treated as NBFC – Investment and Credit Companies ("NBFC-ICC") and would be required to
apply to the RBI for conversion of its certificate of registration ("CoR") from HFC to NBFC-ICC.

Definition of Housing Finance

In general, the term 'housing finance' can be treated as providing finance for residential housing
purposes and should ideally not include finance for non-residential purposes like commercial real estate,
etc. However, there was no formal definition of the term 'housing finance'.

The Revised Framework has set forth a clear definition of housing finance. As per the definition, the
term 'Housing finance' means financing, for purchase/ construction/ reconstruction/ renovation/ repairs
of residential dwelling units which would include (a) loans to individuals or group of individuals including
co-operative societies for construction/ purchase of new dwelling units, (b) loans to individuals or group
of individuals for purchase of old dwelling units, (c) loans to individuals or group of individuals for
purchasing old/ new dwelling units by mortgaging existing dwelling units, (d) lending to builders for
construction of residential dwelling units,(e) loans to corporates/ government agencies for employee
housing, etc.

All other loans including loans given for furnishing dwelling units, loans 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, would be treated as non-housing loans and would not fall under the definition of
'Housing Finance'.

Net owned fund ("NOF") requirement

The Revised Framework has increased the minimum NOF requirement for HFCs from earlier INR 100
million to INR 200 million. As per the Revised Framework, every company proposing to commence/carry
on the housing finance business as its principal business shall be required to have a NOF of not less than
INR 200 million.
Existing HFCs having NOF less than INR 200 million shall be required to achieve NOF of not less than INR
150 Million by 31 March 2022 and NOF of not less than INR 200 Million by 31 March 2023.

In case an existing HFC fails to achieve the prescribed level of NOF within the stipulated period, then
registration of such HFC would be cancelled. In case such HFC proposes to be treated as NBFC-ICC, then
it will be required to apply to the RBI conversion of its CoR from HFC to NBFC-ICC.

Exposure to the group companies engaged in real estate business

The Revised Framework seeks to curb the practice of double financing by the HFCs. Now, HFCs can
either undertake exposure to the group company engaged in real estate business or they can lend to the
retail individual home buyers in the projects of such group companies.

In case a HFC prefers to undertake exposure in group companies, then 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. Further, such exposure would need to be on
arms' length basis.

Applicability of other directions/regulations issued by RBI

The Revised Framework has set forth a list of other regulations which would apply to all HFCs. Further,
HFCs would also need to comply with master directions in relation to the monitoring of frauds in NBFCs,
and information technology framework for the NBFC sector issued and amended by the RBI from time to
time. Further, RBI has proposed that in order to achieve smooth transition, a harmonisation between
the regulations of HFCs and NBFCs will be taken up in a phased manner in the next 2 (two) years. RBI is
expected to issue a comprehensive master direction for HFCs covering all applicable instructions shortly.
HFCs shall, however, continue to comply with all extant instructions issued by NHB, which are not
covered in the Revised Framework.

Advantages of Housing Finance

1. Among the financial services, housing finance creates employment, both directly and indirectly.

2. Industries such as cement, brick manufacturing, sanitary products, electrical fittings and glass
industries experience more demand due to house construction.

3. Rural housing develops not only rural areas but prevents migration of labor to urban areas.

4. Housing finance helps in creation of more houses which results in building up more
infrastructure facilities, such as roads, electricity generation, drinking water facilities, etc.

5. Factories or industrial establishments create townships by providing more housing facilities to

their employees. Housing finance thereby reduces congestion in urban areas.

6. Due to housing finance, there is a vertical expansion and re building of dilapidated houses and re
modelling of the existing houses.

7. Housing facilities not only improve, they also reflect the culture of the country. Chandigarh city
is an example for modern housing which has been built by a French architect.
 8. Non conventional energy gets popularized due to modern housing facilities which is one of the
major benefits of housing finance.

Methods of Housing Finance

Commercial banks and co-operative societies are providing housing finance. Life Insurance Corporation
is also in the race for housing finance.

While providing housing finance, the lender and borrower enter into an agreement under the Transfer
of Property Act, whereby the house to be constructed is mortgaged along with the land to the creditors
who is called mortgagee. The borrower is the mortgagor and he cannot sell the house to any third party
until the loan is repaid. In other words, the financing institution has a charge on the property of the
borrower until he repays the loan.

When the housing loan is repaid, the mortgage is lifted and the ownership of the house is transferred to
the owner. The owner has now an absolute right to transfer or sell to any party he likes. In the case of
granting housing loan to existing houses for the purpose of rebuilding or expansion, the house will be
mortgaged to the financing company, till the loan is repaid.

Tax benefits that boosts housing finance in India:

In order to encourage more house construction in India and to boost housing finance, the Income Tax
Act provides concession to the assesses, under which INR. 30,000 can be availed as tax relief if housing
loan was availed for house renovation work, and if loan was availed for construction purpose, the
interest payment up to INR. 200,000 per year can be written off from the gross income and the principal
paid is covered under section 80C while computing the income tax. Though the Kelkar Committee has
recommended to the government to withdraw these concessions, it is doubtful as to how far
government may agree to these recommendations.