RBI Directives to HFCs

• 18 Feb 2021

Why in News

Recently, the Reserve Bank of India (RBI) issued directives to Housing Finance Companies (HFCs).

• HFCs are specialized Non-Banking Financial Company (NBFC). Recently, the RBI came up with the new definition of HFCs. To qualify as HFCs, a NBFC must have 50% assets as housing loans and 75% of which should be for individual homebuyers.
  • The RBI took over the powers to regulate HFCs from the National Housing Bank (NHB) in 2019.
• The directions, which shall come into force with an immediate effect, are aimed at preventing the affairs of any HFCs from being conducted in a manner detrimental to the interest of investors and depositors.

Key Points

• Liquidity Risk Management:
  
  • All non-deposit taking HFCs with asset size of Rs.100 crore and above and all deposit taking HFCs (irrespective of asset size) shall pursue liquidity risk management.
  • It should cover adherence to gap limits, making use of liquidity risk monitoring tools and adoption of stock approach to liquidity risk.
• Liquidity Coverage Ratio (LCR):
  
  • HFCs shall maintain a liquidity buffer in terms of LCR, which will promote their resilience to potential liquidity disruptions by ensuring that they have sufficient High-Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days.
• Loan-To-Value (LTV) Ratio :
  
  • HFCs lending against the collateral of listed shares shall maintain a LTV ratio of 50%.
  • For loans granted against the collateral of gold jewellery, HFCs shall maintain an LTV ratio not exceeding 75%.
• Investment Grade Rating:
  
  • The central bank also prevented HFC to accept or renew public deposits unless it has obtained a minimum investment grade rating for fixed deposits from any one of the approved credit rating agencies, at least once a year.
• Cover For Public Deposits:
  
  • The RBI asked HFCs to ensure that at all times, there is full cover available for public deposits accepted by them.
    
    • In case an HFC fails to repay any public deposit or part thereof as per the terms, it shall not grant any loan or other credit facility or make any investment or create any other asset as long as the default exists.
  • The central bank also barred HFCs to lend against their own shares.
• Capital Adequacy Ratio (CAR):
  
  • Every housing finance company shall maintain a minimum CAR on an ongoing basis.
    
    • It shall not be less than 13% as on March, 2020, 14% on or before March, 2021, and 15% on or before March, 2022.
• Lending Limit:
  
  • An HFC also cannot lend to any single borrower exceeding 15% of its owned fund, and any single group of borrowers exceeding twenty-five per cent of its owned fund.
• Investment in other Companies:
  
  • It also cannot invest in the shares of another company exceeding 15% of its owned fund and in shares of a single group of companies exceeding 25% of its owned funds.
• Market Exposure:
  
  • The RBI said the aggregate exposure of an HFC to the capital market in all forms (both fund based, and non-fund based) should not exceed 40% of its net worth as on March 31 of the previous year.

Key Words

• Liquidity:
  
  • It is the ability of a firm, company, or even an individual to pay its debts without suffering catastrophic losses.
• Liquidity risk:
  
  • It stems from the lack of marketability of an investment that can't be bought or sold quickly enough to prevent or minimize a loss. It is typically reflected in unusually wide bid-ask spreads or large price movements.
• Liquidity Risk Management:
  
  • Liquidity risk management encompass the processes and strategies a bank uses to:
    
    • Ensure a balance sheet earns a desired net interest margin, without exposing the institution to undue risks from the interest rate volatility.
    • Plan and structure a balance sheet with a proper mix of assets and liabilities, to optimize the risk/return profile of the institution going forward.
    • Assess its ability to meet its cash flow and collateral needs (under both normal and stressed conditions) without having a negative impact on day-to-day operations or its overall financial position.
    • Mitigate that risk by developing strategies and taking appropriate actions designed to ensure that necessary funds and collateral are available when needed.
• Liquidity Coverage Ratio (LCR):
  
  • It refers to the proportion of highly liquid assets held by financial institutions, to ensure their ongoing ability to meet short-term obligations.
• Loan-To-Value (LTV) Ratio:
  
  • It is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
• Liquidity Buffer:
  
  • It refers to the stock of liquid assets that a banking organization manages to enable it to meet expected and unexpected cash flows and collateral needs without adversely affecting the banking organization's daily operations.
• Capital Adequacy Ratio (CAR):
  
  • It is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. It is also known as Capital-to-Risk Weighted Asset Ratio (CRAR). It is decided by central banks to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Source:TH