Housing Finance Company Registration

Housing Finance Company (HFC) Registration is the process of obtaining approval from NHB/RBI to operate as a financial institution providing housing loans.

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Housing Finance Company Registration - An Overview

The National Housing Bank (NHB) was established under the National Housing Bank Bill, 1987, as a regulatory body under the Reserve Bank of India (RBI) to promote housing loans and accelerate construction. Applicants seeking Housing Finance Company (HFC) registration must register with the NHB and meet the prescribed eligibility criteria.

A Housing Finance Company (HFC) is a Non-Banking Financial Company (NBFC) registered under the Companies Act, 2013 or the Companies Act, 1956. Its primary business activity involves providing loans and financial assistance for housing and construction projects.

Definition of Housing Finance Company and Housing Finance

“Housing finance company” shall mean a company incorporated under the Companies Act, 2013 that fulfils the following conditions:

  1. It is an NBFCwhose financial assets, in the business of providing finance for housing, constitute at least 60% of its total assets (netted offby intangible assets). Housing finance for this purpose shall meanproviding finance as stated in RBI directions.
  2. Out of the total assets (netted off by intangible assets), not less than50% should be by way of housing finance for individuals as stated RBI directions.

Note: The above-mentioned conditions shall be treated as PrincipalBusiness Criteria for HFCs and are applicable from the date of originalinstructions issued vide circular DOR.NBFC (HFC).CC.No.118/03.10.136/2020-21 dated October 22, 2020.

“Housing Finance” shall mean financing, for purchase/ construction/reconstruction/ renovation/ repairs of residential dwelling units, which includes:

  1. Loans to individuals or group of individuals including co-operative societies for construction/ purchase of new dwelling units.
  2. Loans to individuals or group of individuals for purchase of old dwelling units.
  3. Loans to individuals or group of 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 or group of individuals for renovation/ reconstruction of existing dwelling units.
  6. Lending to public agencies including state housing boards for construction of residential dwelling units.
  7. Loans to corporates/ Government agencies for employee housing.
  8. Loans for 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 (see note below).
  9. Loans for construction meant for improving the conditions in slum areas, for which credit may be extended directly to the slum-dwellers on theguarantee of the Central Government, or indirectly to them through the State Governments.
  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 as mentioned above, will be treated as non-housing loans and will not be falling under the definition of “Housing Finance”.

Note: Integrated housing project comprising some commercial spaces (e.g. shopping complex, school, etc.) can be treated as residential housing, provided that the commercial area in the residential housing project does not exceed 10 per cent of the total Floor Space Index (FSI) of the project.

Registration

Net Owned Fund (NOF) Requirement

The minimum net owned funds required for a company to start housing finance as its principal business or to operate housing finance as its principal business shall be twenty crore rupees.

Provided that a housing finance company holding a Certificate of Registration (CoR) and having net owned fund of less than Rupees twenty crore, may continue to carry on the business of housing finance, if such company achieves net owned fund of Rupees fifteen crore by March 31, 2022 and Rupees twenty crore by March 31, 2023.

It will be incumbent upon such HFCs whose NOF currently stands below Rupees twenty crore, to submit a statutory auditor’s certificate to Reserve Bank within a period of one month evidencing compliance with the prescribed levels as at the end of the period indicated above. HFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to hold the Certificate of Registration (CoR) as HFCs and registration for such HFCs shall be liable to be cancelled. Such companies, who wish to be treated as NBFC – Investment and Credit Companies (NBFC-ICCs), will be required to approach RBI for conversion of their Certificate of Registration from HFC 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 approving the conversion.

Investment through Alternative Investment Funds for calculation of NOF

In terms of Section 29A of the National Housing Bank Act, 1987, the investments/ loans/ exposures to subsidiaries, companies in the same group and other HFCs, in excess of 10 per cent of owned fund, is reduced from the owned fund, in orderto arrive at NOF of an HFC. In this context, while arriving at the NOF, investment made by HFC in entities of the same group, either directly or indirectly, for example through an Alternative Investment Fund (AIF), shall be treated in the same manner, provided the funds in the AIF (company) have come from HFC to the extent of 50% or more; or where the beneficial owner in the case of AIF (trust) is the HFC and 50% of the funds in the Trust have come from the HFC. For this purpose, “beneficial ownership” would mean holding the power to make or influence decisions in the Trust and being the recipient of benefits arising out of the activities of the Trust.

The registered HFCs which do not currently fulfil the criteria as specified in the RBI directions, but wish to continue as HFCs, shall be provided with the following timeline for transition:

Timeline Minimum percentage of total assets towards housing finance Minimum percentage of total assets towards housing finance for individuals
March 31, 202250%40%
March 31, 202355% 45%

Such HFCs were required to submit to the Reserve Bank, a Board approved plan within three months from the date of original instructions issued vide circular DOR.NBFC (HFC).CC.No.118/03.10.136/2020-21 dated October 22, 2020, including a roadmap to fulfil the above-mentioned criteria and timeline for transition. HFCs unable to fulfil the above criteria as per the timeline shall be treated as NBFC – Investment and Credit Companies (NBFC-ICC) and they will be required to approach the Reserve Bank for conversion of their Certificate of Registration from HFC 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 and necessary Board resolution approving the conversion.

Procedure for Housing Finance Company Registration

The following procedure must be followed by the applicant for housing finance company registration:

  • First the applicant has to download the application form for Housing Finance company registration from the website nhb.org.in.
  • All the Documents have to be attached along with the application. The demand draft in Favour of the NHB also must be attached. This must be submitted in the Head Office of the NHB.
  • The NBH would check the authenticity of the application. If the Documents provided are sufficient then the NBH would go ahead and register the housing finance company.

Documents required

The following Documents are required for Housing Finance Company Registration:

  • Board Resolution Passed by the Company
  • MOA and AOA of the company. These have to be copies
  • Minimum NOF proof of Rs. 20 Crore
  • Information and proof of the source of funds
  • Business Plan for three years for the company
  • Information on financials- Audited financial report for the past three years
  • Information on the Directors of the Company- Qualifications and Experience
  • If the Directors have any other roles in other organisations, then information on the same must be provided X
  • DD in Favour of the NBH payable at New Delhi.

What are the conditions pertaining to the grant of Housing Finance Company Registration by NHB?

Once a registration application is submitted, NHB (National Housing Board) will review the application and grant a Certificate of Registration after proper background verification and fulfilment of following conditions as per sub-section (4) of Section 29A of NHB act, 1987:

  • HFC is or shall be in a position to pay its present or future depositors in full as and when their claims accrue.
  • The Business Affairs of the Housing Finance Company are not being or are not likely to be conducted in a manner adverse to the interest of its present or future depositors.
  • The operations and policy of the company should not be against the public interest or against the interest of the depositors.
  • HFC has sufficient capital structure and better earnings prospects.
  • Public interest shall be served, once the certificate of registration is granted to the HFC to commence or carry on the business in India.
  • Any other condition, fulfilment of which in the opinion of the NHB, shall be necessary to ensure that the commencement of or carrying on the business in India by an HFC shall not be prejudicial to the public interest or in the interests of the depositors.

Restriction on Investment in Real Estate

No housing finance company, shall invest in land or buildings, except for its own use, an amount exceeding twenty per cent of its capital fund (i.e. sum of Tier 1 and Tier 2 capital),

Provided that such investment over and above ten per cent of its owned fund, shall be made only in residential units.

Provided that the land or buildings acquired in satisfaction of its debts shall be disposed of by the housing finance company within a period of three years or within such a period as may be extended by the NHB, from the date of such acquisition, if the investment in these assets together with such assets already held by the housing finance company exceeds the above ceiling.

Regulatory Restrictions and Limits

Ceiling on IPO Funding

There shall be a ceiling of Rs.1 crore per borrower for financing subscription to Initial Public Offer (IPO). HFCs can fix more conservative limits.

Loans against HFCs own shares prohibited

No HFC shall lend against its own shares.

Declaration of dividends

HFCs shall comply with the following guidelines to declare dividends.

  1. The Board of Directors, while considering the proposals for dividend, shall take into account each of the following aspects:
    • Supervisory findings of the National Housing Bank (NHB) on divergence in classification and provisioning for Non-Performing Assets (NPAs).
    • Qualifications in the Auditors Report to the financial statements.
    • Long term growth plans of the HFC
  2. HFCs that meet the following minimum prudential requirements shall be eligible to declare dividend:
    • HFCs shall have met the minimum capital requirements prescribed under Paragraph 6 of this Master Direction in each of the last three21 financial years including the financial year for which the dividend is proposed.
    • The net NPA ratio shall be less than six per cent in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.
    • HFCs shall comply with the provisions of Section 29 C of the National Housing Bank Act, 1987.
    • HFCs shall be compliant with the prevailing regulations/ guidelines issued by the Reserve Bank or National Housing Bank. The Reserve Bank or National Housing Bank shall not have placed any explicit restrictions on declaration of dividend.
  3. HFCs that meet the eligibility criteria specified in above can declare dividend upto a dividend payout ratio of 50 per cent.
  4. An HFC which does not meet the applicable capital requirements and/ or the net NPA ratio requirement as above, for each of the last three financial years, shall be eligible to declare dividend, subject to a cap of 10 per cent on the dividend payout ratio, provided the HFC complies with both the following conditions:
    • meets the applicable minimum capital requirement, as per this Master Direction, in the financial year for which it proposes to pay dividend, and
    • has net NPA of less than four per cent as at the close of the financial year.
  5. The Board shall ensure that the total dividend proposed for the financial year does not exceed the ceilings specified in these guidelines. The Reserve Bank or the National Housing Bank shall not entertain any request for ad-hoc dispensation on declaration of dividend.
  6. HFCs declaring dividend shall report details of dividend declared during the financial year as per the format prescribed in RBI direction. The report shall be furnished within a fortnight after declaration of dividend to National Housing Bank.

Reporting Requirements

  1. Copies of balance sheet and accounts together with the Directors’ report to be furnished to the NHB
    A copy of the financial statements, including consolidated financial statement, if any,along with the auditor’s report and report of the Board of the Directors and all thedocuments which are required to be attached to such financial statements under theCompanies Act 2013, duly adopted at the annual general meeting of the company,shall be submitted to NHB within fifteen days of the date of the annual generalmeeting.
  2. Auditor’s Certificate
    Every housing finance company holding/ accepting public deposits shall furnish to the NHB, along with the copy of the audited balance sheet as provided in RBI directions, a copy of the auditor’s report to the Board of Directors and a certificate from its auditors to the effect that the full amount of liabilities to the depositors of the company including interest payable thereon are properly reflected in the balance sheet and that the company is in a position to meet the amount of such liabilities to the depositors.
  3. Returns to be submitted to the NHB
    HFCs shall comply with any reporting requirements prescribed by the NHB from time to time.

What are the conditions pertaining to the cancellation of the Housing Finance Company License by the NHB?

NHB may cancel a certificate of registration granted to a housing finance company in some of the circumstances when such HFC failed to comply with the directions of NHB or NHB act.

However, cancellation is subject to certain provisions, if such company:

  • Ceases to carry on the business of financing in India; or
  • HFC has not complied with the below-mentioned terms and condition prescribed by the NHB:
  • to comply with any direction issued by the National Housing Bank under the provisions of Chapter V of the National Housing Bank Act 1987; or
  • to maintain accounts in accordance with the requirement of any law or any direction or order issued by the National Housing Bank under the provisions of Chapter V of the National Housing Bank Act 1987; or
  • Mandatory to submit its books of accounts and other relevant Documents as per NHS Act, when it is demanded by an inspecting authority of the National Housing Bank; or
  • Has been prohibited from accepting deposit by an order made by the National Housing Bank under the provisions of this Chapter V of the National Housing Bank Act, 1987 and such order has been in force for a period of not less than 3 months.

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