Regulation of Housing Finance Corporations

The Central Government of India may give the power to regulate the various housing finance corporations (HFCs) in the country to the Reserve Bank of India (RBI). The inclusion of RBI in the regulatory role would mean stringent asset quality reviews for the HFCs. RBI would force the HFCs to face high scrutiny and it may penalize them with strict financial penalties and restrictions on their activities if the lenders resort to unfair trade practices.

There are about 80 HFCs in India which include the Indiabulls Housing Finance Ltd, Housing Development Finance Corporation (HDFC) and Dewan Housing Finance Corporation (DHFL).

What is the current situation?

• The housing finance companies are currently regulated by the National Housing Board (NHB). It was controlled by the RBI before the government took control of the NHB from the RBI.
• The HFCs belong to a broader shadow banking sector known as non-banking finance companies (NBFCs).
• It is called shadow banking as these NBFCs are very loosely regulated, with several regulators including the RBI having some role but no one is fully accountable.
• The RBI s oversight of HFCs will be a step towards the authorities getting a firmer grip on the risky shadow banking sector. It will help to contain any systemic problems.

Why RBI needs to be involved?

• The downgrading of a few HFCs by a few credit rating firms has fears of credit-risk.
• It has hurt the ability of the HFCs to raise funds for more lending.
• This has made it difficult for consumers and small businesses to obtain loans and ultimately has hurt car and motorbike sales.
• The RBI having regulatory powers over the HFCs will make it easier for the RBI to open any credit lines for the HFCs if they need it.

Past instances

In the past, in 2015, the RBI had started a similar review of bank assets as there was news that some banks were hiding the extent of the bad debts on their books. The RBI’s review came across a plethora of instances where lenders were under-reporting their bad loans. The RBI imposed financial penalties for some lenders and eventually fed into decisions to impose tougher restrictions on their loan books while their bad debts remained high.