Insight to Housing Finance Companies (HFCs)

Introduction:

In today’s era, housing is undeniably considered as a basic human requirement however, the capital or funds required to construct or acquire a house is relatively high and cannot be afforded by all individuals/groups especially the ones having low income or less funding/capital. In such situations, housing finance could act as a favourable alternative in meeting the monetary aspects of housing facilities.

The term housing finance (home loan) involves financial assistance in the form of loan provided to an individual or group including cooperative societies, builders, individual buyers, home buyers, corporate borrowers, etc in order to buy or build a house/houses. Such funds for purchasing, constructing or modifying a house are facilitated by housing finance companies (HFCs).

In housing sector, finance serves the following purposes, namely –

1. Purchasing a land/house/plot
2. Acquisition of an apartment/flat
3. Construction of house
4. Purchase of building materials
5. Establishment of a society or a residential building
6. Repair/alteration or renovation of the existing house
7. Extension of the existing house, etc.

Significance of Housing Finance

Apart from securing a physical shelter, adequate housing facilities also have a significant impact on lives of the dwellers in terms of better living conditions, increased security against natural calamities resulting better health, decreasing economic inequalities, preserving self-confidence and human dignity.

Various factors stimulating the need for housing finance in the contemporary world includes,

1. Urbanization
2. Population growth
3. Economic inequalities
4. Insufficient capital
5. Extinction of joint family system
6. Affordable housing finance offered by the HFCs
7. Risk-bearing capacity of the lender, etc.

Nowadays, despite the fact that housing is an expensive commodity and requires a substantial amount of money, the middle class and lower middle class are able to afford their own houses with the adequate structural requirement with the help of monetary assistance provided by HFCs.

Thus, through the facilities of housing finance or home loans, the HFCs enables the buyer/dwellers to procure, built, develop, maintain, repair or renovate their own homes irrespective of their financial conditions/resources.

Regulatory Bodies over housing Finance Companies in India

1. National Housing Bank

The national housing bank (NHB) was established on the day of July 9^th,1988 under the National Housing Bank Act, 1887 as an apex body for housing finance in India. It was set up by the government of India with the primary vision of acting as a principal body or regulatory agency in order to promote and supervise housing finance institutions at both local and regional levels. It also aimed to provide financial as well as other support incidental to such institutions whenever necessary.

The NHB was established to achieve the following objectives –

1. For the promotion of a sound, viable, healthy and cost-effective (lucrative) housing finance system in order to cater and serve to all the segments of the population.
2. For the integration of the housing finance system with the overall financial system.
3. For the promotion of network comprising dedicated and devoted housing finance institutions to adequately serve to various regions and people belonging to different income groups.
4. For augmentation (raise/expansion) of resources for the sector and to channelize and utilize them for housing
5. For regulating the activities of housing finance companies (HFCs) on the basis of regulatory and supervisory authority derived under the National Housing Bank Act, 1887.
6. To make housing finance or credit more affordable.
7. To encourage the augmentation of supply of buildable lands along with building materials for housing. In addition to this, NHB also aimed to upgrade the housing stock in a country.
8. To encourage or stimulate the public agencies to emerge as a facilitator and supplier of service lands for the purpose of housing.

Major Functions of NBH

1. Promotion and development of the housing sector
2. Providing financial assistance to HFCs
3. Supervision over housing finance companies (HFCs) as an apex regulatory body

2. Reserve Bank of India [The Finance (No. 2) act, 2019]

The central government of India, through the Finance (NO.2) Act, 2019 (23 of 2019) amended the national housing bank act, 1887 and conferred the powers of regulation and supervision of housing finance companies to the reserve bank of India (RBI).

Therefore, as per the latest provisions of 2019, every housing finance institution (commenced after the finance (No.2) Act came into force) which is a company shall have to make an application for registration to the RBI instead of NBH in such as manner as may be specified by the reserve bank of India[1].

Additionally, from the commencement of this act, the RBI may, whenever considers it necessary, direct[2] the national housing banks to inspect the books of registered housing finance companies and submit them to the reserve bank of India.

The reserve bank of India also stated that until the latest regulatory framework and guidelines will be provided by RBI, the housing finance companies have to comply with the directions and instructions given by the national housing bank

Guidelines proposed by RBI for housing finance companies [June 2020]

In its draft, the reserve bank of India proposed the following changes regarding the regulation of housing finance sector –

• RBI, in its draft, defined the meaning of the term “housing finance” (previously not defines under NHB act) and “providing for housing finance” as – financing for the purchase/construction/reconstruction/renovation and repairs of residential dwelling units, which includes –

• Providing loans (housing finance) to individual or groups for the purchase or construction, etc. of new as well as old dwelling units.
• Provides provision for mortgaging existing dwelling units Providing loans to individuals in order to new/old dwelling unit.
• Providing finance to a builder for the construction of residential dwelling unit/units.
• Lending to cooperates as well as government agencies through loans for employee housing.
• Providing finance for the construction of educational, social, cultural and health centres or institutions in the same complex which is a part of the same housing project.
•  Providing lending for the housing and related infrastructure of slum dwellers on the guarantee of the government.

• The new draft classifies HFC into two categories, namely, systematically important – companies having asset size of 50 crore and above.

Non- systematically important – housing finance companies having asset size below 500 crores.

• RBI also proposed to include the term “principal business” for the purpose of registration of housing finance (similar to the definition lain down for the non-banking financial institutions or NBFI) i.e. in order to qualify as an HFC,

firstly, it is required to have financial asset more than 50% of its total asset (netted off by intangible asset) and

secondly, HFC’s income from such financial asset exceeds 50% of its gross income.

3. Housing Urban Development Cooperation (HUDO)

The housing urban development ltd. is a government-owned organization set up in the year 1970 with the primary objective of promoting and regulating the housing finance for infrastructural development in an urban society. It plays a key role in the process of implementing national housing policies.

HUDC is one of the major housing finance company catering to the needs of housing finance of individuals or groups including loans for construction, extension, repair, renovation, purchase, etc. It also provides consultancy services to various housing development projects in urban areas. Apart from assigning loans to urban projects, it also provides finances for housing purposes in rural areas.

Other financial institutions providing housing finance includes – commercial banks, cooperative banks, regional rural banks, cooperative housing finance societies, agriculture and rural development banks, etc.

Conclusion

Access to safe and healthy shelter is considered crucial to a person’s physical, social, phycological and economic wellbeing. Ensuring adequate housing facilities to all segments of the society is essentially a duty of the government. Therefore, it is the utmost responsibility of the government to frame such laws and regulations as to provide affordable housing facilities to everyone especially ones having scarce financial stability. In a country like India where a large population belongs to a lower-middle-class group, the facilities of the housing finance sector have a much larger scope. Also, housing finance schemes can be proved as a catalyst in improving the living standard of people and eradicating the economic inequalities among different sections of society.

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References:

• Hudo.org
• The finance (No. 2) act, 2019
• The national housing bank act, 1887
• www.researchgate.net
• www.manuparafast.in

[1] Section 154(2) of Finance (NO. 2) act, 2019

[2] Section 154(2)(c) (proviso) of the Finance (No.2) act, 2019