Guidelines for Asset Liability Management System in HFC, Fair Trade Practice Code for HFC’s, Housing Finance Agencies

Guidelines for Asset Liability Management System in HFC

Housing Finance Companies (HFCs) are exposed to credit and market risks in view of the asset-liability transformation. With liberalisation in Indian financial markets over the last few years and growing integration of the domestic markets with external markets, the risks associated with the operations of an HFC have become complex and large, requiring strategic management.

HFCs are operating in a fairly deregulated environment and are required to determine on their own, interest rates on advances and deposits, subject to the ceiling on maximum rate of interest they can offer on deposits, on a dynamic basis. The interest rates on investments of HFCs in government and other securities are also now market related. Intense competition for business involving both the assets and liabilities has brought pressure on the managements of HFCs to maintain a good balance amongst spreads, profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The managements of HFCs have to base their business decisions on a dynamic and integrated risk management system and process driven by corporate strategy. HFCs are exposed to several major risks in the course of their business; Credit risk, Interest rate risk, equity/commodity price risk, liquidity risk and operational risk. It is, therefore, important that HFCs introduce effective risk management systems that address the issues relating to interest rate and liquidity risks.

• ALM Information System

⇒ Management Information Systems 9- n

⇒ Information availability, accuracy, adequacy and expediency

• ALM Organisation

⇒ Structure and responsibilities

⇒ Level of top management involvement

• ALM Process

⇒ Risk parameters

⇒ Risk identification

⇒ Risk measurement

⇒ Risk management

⇒ Risk policies and tolerance levels

a) Successful implementation of the risk management process would require strong commitment on the part of the senior management in the HFC, to integrate basic operations and strategic decision making with risk management. The Board should have overall responsibility for management of risks and should decide the risk management policy of the HFC and set limits for liquidity, interest rate, exchange rate and equity price risks.

b) The Asset-Liability Committee (ALCO) consisting of the HFC’s senior management including the Chief Executive Officer (CEO) should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the HFC (on the assets and liabilities sides) in line with the HFC’s budget and decided risk management objectives.

c) The ALM Support Groups consisting of operating staff should be responsible for analysing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) reflecting the impact of various possible changes in market conditions on the balance sheet and recommend the action needed to adhere to HFC’s internal limits.

• Liquidity risk management
• Management of market risks
• Funding and capital planning
• Profit planning and growth projection
• Forecasting and analysing ‘what if scenario’ and preparation of contingency plans

Fair Trade Practice Code for HFC’s

Housing Finance Companies (HFCs) which are a part of the financial system contribute to the economic growth by increasing the outreach of the housing credit delivery mechanism. To provide for transparency in transactions between the institutions and the end users and also to provide for well-informed business relationships, some broad guidelines have been considered necessary. In this backdrop, the National Housing Bank, has framed the Guidelines on Fair Practices Code for HFCs to serve as a part of best corporate practices and to provide transparency in business practices. This Code has been formulated by the EHFL to achieve the following objectives:

• To promote good and fair practices by setting minimum standards in dealing with customers.
• To increase transparency so that the customer can have a better understanding of the services that can be expected from the Company.
• To encourage market forces, through competition, to achieve higher operating standards.
• To promote a fair and cordial relationship between the Company and its customers.
• To foster confidence in the housing finance system.

Transparency

The Company shall at all times abide to act in fair, reasonable and transparent manner in all its dealings with the customer by safeguarding that:

• The Company fulfils the commitments and standards of this Code for the products and services offered by it and in the procedures and practices that its staff follows
• The products and services of the Company meet all the relevant laws and regulations in letter and spirit
• The dealings with its customers are based on the ethical principles of integrity and transparency.

Advertising, Marketing & Sales

• The Company shall ensure that all advertising and promotional material is clear, and not misleading.
• The Company shall ensure that any advertising in any media and promotional literature that draws attention to a service or product of the Company and includes a reference to an interest rate, shall also indicate whether other fees and charges will apply and that full details of the relevant terms and conditions, if any, shall be made available on request.
• In case of availing third party services for providing support services, the Company shall ensure that such third parties handle customer’s personal information (if any available to such third parties) with the same degree of confidentiality and security as the Company would.
• The Company ensures to provide the information on interest rates, common fees and charges through putting up notice(s) at its branches/offices; through telephone or help-line; on company’s website; through designated staff/ help desk or by providing service guide / tariff schedule.
• The Company shall communicate to the customer from time to time, on various features of the products availed by them. Information about the other products/services or promotional offers in respect of its products/services of the Company may be conveyed to customers only if he / she has given his / her consent to receive such information / service, including, by way of an email or by registering for the same on the Company’s website or on customer service number of the Company.
• The Company shall ensure the Code of Conduct the Direct Selling Agencies (DSAs) whose services are availed by the Company to market products / services, amongst other matters, specifically requires the DSAs to identify themselves while approaching a customer for selling the products personally or via phone.
• The Company shall ensure that in the event of receipt of any complaint from the customer that the Company’s representative/ courier or DSA has engaged in any improper conduct or acted in violation of this Code, appropriate steps shall be initiated to investigate and handle the complaint and to make good the loss caused, if any.

Loan Application & Processing

a) Loan application forms should include necessary information which affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other HFCs can be made and informed decision can be taken by the borrower. The loan application form may indicate the list of documents required to be submitted with the application form.

b) The Company should devise a system of giving acknowledgement for receipt of all loan applications. Preferably, the time frame within which loan applications will be disposed of should also be indicated in the acknowledgement.

Guarantors

• Whether the Company will have recourse to his / her other monies in the Company if he/ she fails to pay up as a Guarantor.
• Whether his/her liabilities as a guarantor is limited to a specific quantum or are, they unlimited
• Time and circumstances in which his/ her liabilities as a guarantor will be discharged; and the Company shall keep them informed of any material adverse change in the known financial position of the borrower to whom they stand as a guarantor.
• In case the guarantor refuses to comply with the demand made by the creditor /lender, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter.

Housing Finance Agencies

State Housing Finance Agencies (HFAs) are state-chartered authorities established to help meet the affordable housing needs of the residents of their states. Although they vary widely in characteristics such as their relationship to state government, most HFAs are independent entities that operate under the direction of a board of directors appointed by each state’s governor. They administer a wide range of affordable housing and community development programs.

At the center of HFA activity within the states and NCSHA’s work in Washington are three federally authorized programs:

• The Housing Bonds
• The Housing Credit
• The HOME Investment Partnerships (HOME) program.