by The Housing Finance Company is yet another form of non-banking financial company which is engaged in the principal business of financing of acquisition or construction of houses that includes the development of plots of lands for the construction of new houses.
The Housing Finance Company is regulated by the National Housing Bank. Any non-banking finance company can operate as a housing finance company, subject to the fulfillment of basic requirements as specified in the Companies Act, 1956.
- The company should obtain a certificate of registration (COR) from the National Housing Bank (NHB). The company conducting such business without a COR is an offense punishable under the provisions of the National Housing Bank Act, 1987, also the NHB can demand the winding up of such company.
- The company should have its primary business of providing finance for housing, whether directly or indirectly.
- The company should have minimum Net Owned Fund of Rs 10 Crore.
Once these basic requirements are fulfilled, the company should comply with the following conditions to get registered as a Housing Finance Company:
- The affairs of the housing finance company should not be detrimental to the interest of the present and future depositors.
- The company shall be in such a position that it is able to meet the full claims of its present as well as future depositors as and when these accrue.
- The management of the company should not be prejudicial towards public interest or to the interest of its depositors.
- The Company should have an adequate capital structure and better income prospects.
The certificate of registration shall not be prejudicial to the operation and growth of housing finance sector of the country.
Housing Finance Policy Aspect
India’s national housing policy insists on providing more dwelling houses to the citizens. It is only natural for the government to create institutions which can provide housing finance.
At the international level, institutions such as World Bank and Asian Development Bank provides both grants and loans, especially soft loans for removing slums and for the creation of housing colonies. In fact, in India, the World Bank has financed Sites and Service Schemes to a number of state governments, thereby, both housing and promotion of small-scale industries are simultaneously encouraged.
In 2019, ‘Infrastructure Leasing & Financial Services Limited’ (IL&FS), India’s leading infrastructure development Non-Banking Financial Company (NBFC) defaulted on its debt payments. Housing Finance Companies, including HDFC, Dewan Housing Finance Ltd (DHFL), PNB Housing Finance Ltd (PNBHFL) and LIC Housing Finance Ltd (LICHFL), had high exposure to IL&FS. As a result, the crisis triggered a liquidity crunch in the housing finance sector. The Reserve Bank of India (RBI), therefore, proposed to take over the regulation of Housing Finance Companies (HFCs) by amending the National Banking Act from the National Housing Bank (NHB). The NHB had been set up as an apex institution to regulate housing finance in 1988.
The overall mandate given to the NHB is to make retail housing finance affordable to all sections of the society. The RBI, in November 2019, issued a notification withdrawing exemption given to HFCs which allowed the NHB to regulate them. HFCs came under the purview of the RBI through Section IIIB of the RBI Act.
Sources of Funds
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.
NBFCs raise capital in the short-term (1-3 months) commercial paper (CP) market at a lower cost, as compared to the long term (5-10 years) nonconvertible debenture (NCD) market but face the risk of rolling over the CP debt at short frequencies of a few months.4 The frequent repricing exposes NBFCs to the risk of facing higher financing costs and, in the worst case, credit rationing.
Advantages of Housing Finance
- Industries such as cement, brick manufacturing, sanitary products, electrical fittings and glass industries experience more demand due to house construction.
- Among the financial services, housing finance creates employment, both directly and indirectly.
- Rural housing develops not only rural areas but prevents migration of labor to urban areas.
- Factories or industrial establishments create townships by providing more housing facilities to their employees. Housing finance thereby reduces congestion in urban areas.
- 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.
- Due to housing finance, there is a vertical expansion and re building of dilapidated houses and re modelling of the existing houses.
- Non conventional energy gets popularized due to modern housing facilities which is one of the major benefits of housing finance.
- 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.
