This article is written by G. Srilakshmi, pursuing a Certificate Course in Real Estate Laws from Lawsikho.com.

Introduction

A housing finance company (HFC), as the name suggests, is a company that is set up with the objective of providing finance for housing needs. On August 13th 2019, the Reserve Bank of India (RBI) issued a press release regarding the transfer of regulation of housing finance companies to the Reserve Bank of India. The press release notified that housing finance companies shall now be treated as Non-Banking Financial Companies (NBFCs) for regulatory purposes. This notification came as a result of the Finance (No.2) Act, 2019, which amended the National Housing Bank Act, 1987. National Housing Bank (NHB) used to be a subsidiary of the RBI but after enactment of the Finance Act, 2019, the NHB is a complete central government-owned entity.

Supervision of HFCs

In the press release dated 13th August 2019, RBI notified that “Reserve Bank of India will carry out a review of the extant regulatory framework applicable to HFCs and come out with revised regulations in due course”. However, the HFCs will have to comply with the directions and instructions issued by the NHB till the RBI frames and announces a revised framework. According to the Preamble of the National Housing Bank Act, 1987 (NHB Act), the basic function of the NHB is to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions. RBI further clarified that the NHB will still be responsible for the supervision of HFCs and HFCs will continue to submit various returns to NHB. The NHB will also continue to handle the grievance redressal mechanism of the HFCs.

Registration of HFCs

Earlier, apart from registering with the Registrar of Companies, an HFC is also required to be registered with the National Housing Bank. The RBI changed the rule regarding registration and stated that “A housing finance institution, which is a company, desirous of making an application for registration under sub-section 2 of section 29A of the National Housing Bank Act, 1987 (as amended by Act 23 of 2019) may approach the Department of Non-Banking Regulation, Reserve Bank of India.”

According to Section 29A(2) of the NHB Act, no housing finance company shall carry on housing finance as its primary business unless it has obtained a certificate issued under Chapter V of the NHB Act and has a net owned fund of 10 crore rupees (or such amount as the RBI may notify).

While considering an application for registering a housing finance institution as an HFC, the RBI looks into the criteria mentioned under Section 29A(4) of the NHB Act. The criteria are:

• the housing finance institution is/ shall be in a position to fully pay its present/ future depositors when their claims accrue;
• the affairs of the housing finance institution are not being conducted in a manner detrimental to its depositors;
• the housing finance institution is not being managed in a way that is prejudicial to public interest or interests of its depositors;
• the housing finance institution has sufficient capital structure and earning prospects;
• granting certificate of registration to that housing finance institution shall serve the public interest;
• granting certificate of registration to that housing finance institution shall not be prejudicial to operation and overall growth of the housing finance sector in India;
• any other condition which the RBI shall deem to be necessary to ensure that the housing finance institution’s business shall not be prejudicial to the public interest or in the interest of depositors.

Advantages of borrowing from HFCs

Borrowing from HFCs presents lucrative advantages. Some of the distinguishing features that make HFC borrowings desirable are:

• Less stringent about credit score

Unlike banks, HFCs are not stringent about lending to people only with a good credit score. HFCs have their parameters to judge a person’s worthiness and tend to be lenient while accounting for practical factors that may reduce a person’s credit score. They are willing to lend to people belonging to the low-income group or economically weaker sections and those from informal segments even though they do not have any credit history. HFCs tend to have higher interest rates when compared to banks, which is why they do not hesitate to lend to those people whose credit score is below 750.

• Higher loan amount

HFCs are open-ended while assessing various sources of income. Due to such lenient assessment, the income calculated is higher and in turn, one can obtain a higher loan amount. 

• Stamp duty and registration costs

In most states of India, the stamp duty amounts to 5% to 7% of the market value of the property. Further, one incurs registration charges of 1% of the market value of the property. Banks generally don’t consider the additional costs one incurs while buying property. HFCs, on the other hand, include stamp duty and registration costs while sanctioning the loan amount. However, it must be noted that on 8th April 2015, NHB issued a statement prohibiting HFCs from increasing the loan quantum by including stamp duty and registration charges for properties that cost more than Rs.10 lakhs in value. Properties that cost less than Rs.10 lakhs have been excluded to promote affordable housing.

• Quick processing

The documentation policy and process are way simpler in HFCs. This means the time taken to process the loan application is lesser when compared to banks. Most HFCs have consumer-friendly websites that provide a hassle-free experience to borrowers.

• Customized loans 

An added advantage is that HFCs propose variable loan periods and processing fees. So, borrowers can pick and choose their terms and conditions that highly affect their borrowing experience and makes it a lot smoother.

Top 5 HFCs

Market capitalization and net profit are the distinguishing bases used to pick the top players in the HFC industry. All the HFCs mentioned below have been granted Certificate of Registration (COR), along with permission to accept public deposits. Further, the below listed HFCs are not required to obtain prior written permission before accepting any public deposits. The below-mentioned HFCs have received many awards but only the most recent ones have been mentioned to maintain relevance. Here is a list of top five HFCs in no particular order of rank or preference:

• Housing Development Finance Corporation Limited

Housing Development Finance Corporation Limited (HDFC) was incorporated in 1977 with the objective of enhancing residential housing stock in India and to promote ownership of homes. It was promoted by the Industrial Credit and Investment Corporation of India Limited along with International Finance Corporation, Washington, and the Aga Khan Foundation. Its Initial Public Offering (IPO) took place in 1978. It has 3 representative offices abroad that offer home loans to NRIs and Persons of Indian Origin (PIO). It has an interactive website with a document checklist and a home loan EMI calculator. It is the only company in the finance sector to host a website in 6 Indian languages; the URL is https://www.hdfc.com.

Kinds of loans

It provides home loans for the purchase of a flat/ row house/ bungalow from private developers in approved projects; properties from Development Authorities; and construction on a plot. Its plot loans include loans for purchasing plots through direct allotment, resale plots, and transferring the outstanding loan from other banks or financial institutions. The rural housing finance is specially designed for agriculturists, planters, horticulturists, and dairy farmers. Further, it provides improvement loans, home extension loans, top-up loans and loans under Pradhan Mantri Awas Yojana (PMAY).

Awards

HDFC was recognised as the Best ‘Private Sector Financial Institution’ for PMAY-CLSS at PMAY Empowering India Awards 2019. It is the only Indian company that is featured in the top 10 consumer financial services companies in the world as a part of the Forbes Global 2000 List for four consecutive years.

• LIC Housing Finance Limited

LIC Housing Finance Limited (LIC HFL) was incorporated in 1989. It was promoted by Life Insurance Corporation of India with the objective of providing finance to people for purchase or construction of house/ flat for residential purposes. It sold shares to the public with an IPO in 1994 and its stocks are listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). It has 4 subsidiary companies. It has a mobile application, LIC HFL Home Loan App, and a website. Apart from features like online loan application and loan eligibility calculator along with EMI, the website also features a LIC HFL stock market tracker;  the URL is https://www.lichousing.com.

Kinds of loans

It provides loans to both Resident Indians and NRIs for purchase, construction, and extension of properties. The loan offered for pensioners is of two kinds: before retirement and after retirement. Apart from funding staff quarters for corporates, it offers 2 kinds of Line of Credit: the Line of Credit ‘To’ Scheme is for corporates that have housing finance schemes for their employees, whereas the Line Of Credit ‘Through’ Scheme caters to corporates that don’t have a direct House Building Allowance (HBA). It also offers construction finance loans and term loans for builders and developers.

Awards

Brand Advertising Research & Consulting Private Limited (BARC) Asia had declared LIC HFL as the Brand of the Decade 2018-2019.

• Housing and Urban Development Corporation Limited

Housing and Urban Development Corporation Limited (HUDCO) is a public sector enterprise under the Ministry of Housing and Urban Affairs (MoHUA). It was established in 1970 with the motto of ‘profitability with social justice’. Its authorized capital is Rs. 2,500 crore and to date the paid-up capital is Rs. 2,001.90 crore. It envisions to promote sustainable habitat development to contribute to a high standard of living. It was conferred the Mini Ratna status in 2004. HUDCO has an informative website; the URL is https://hudco.org.

Kinds of loans

The housing finance offered by it is classified into 3 kinds: Social Housing, Residential Real Estate, and HUDCO Niwas. However, they have ceased sanctioning new social housing and residential real estate loans to private sector entities since March 2013. Under HUDCO Niwas, loans are provided to individuals for the purchase of houses/ flats/ plots, construction of houses, extension/ improvement of existing houses/ flats, and refinancing of existing housing loans. They also provide bulk loans to State governments, parastatal institutions of the State government, and for-profit Public Sector Units (for providing HBA to their employees). Further, term loans for slum up-gradation and urban infrastructure in the form of water supply, roads & transport, power, sewerage & drainage, etc. are also financed.

Awards

In 2018, HUDCO was conferred ‘6th Annual Greentech CSR Award – Gold Category’ in the service sector for outstanding achievement in Corporate Social Responsibility (CSR) activities. HUDCO was also conferred with the Technology Sabha Award in 2019 in the category of ‘Enterprise Applications’.

• Can Fin Homes Limited

Can Fin Homes Limited was promoted by Canara Bank in 1987. Incidentally, 1987 was the International Year of Shelter for the Homeless. It is the first HFC floated by a Nationalised Bank in India. It was set up with the object of encouraging ownership of homes across the country with a motto of ‘friendship finance and good service’. It became a listed company in 1991 and has a history of uninterrupted profits and payment of dividend since inception. Can Fin Homes Limited has a useful website; the URL is https://www.canfinhomes.com.

Kinds of loans

It is very inclusive and lends to low and middle-income group individuals, as well as first time home buyers. By 2017, they had opened 15 Affordable Housing Loan Centres. It provides individual housing loans and commercial housing loans for the purchase of either completed or under construction flat/ house, and undertaking repair or renovation. Their composite loan is for purchasing a site and constructing a house thereon, whereas a top-up loan is for existing customers who want to repair or renovate their dwelling unit. Apart from affordable housing loans (both rural and urban), it also provides loans to the Economically Weaker Section, Low-Income Group, and Middle Income Group under CLSS and PMAY.

Additionally, it provides non-housing loans like site loans, loans for commercial property, loans against rent receivables, education loans, and pensioners’ loans. 

Awards

In 2018, Financial Express ‘India’s Best Bank Awards’ had chosen Can Fin Homes Ltd. as the runner up in the NBFC category for FY 17.

• Punjab National Bank Housing Finance Limited

Punjab National Bank Housing Finance Limited (PNB HFL) was incorporated in 1988. It was promoted by the Punjab National Bank with placing people first, maintenance of ethical standards, and customer-centric business as its core values. It opened up for IPO in 2016 and its stock is listed on NSE and BSE. Its website has an option for property search, where it assists its customers in selecting and finalizing an optimal property. This service is free of cost and suggests only RERA approved projects. The website URL is https://www.pnbhousing.com.

Kinds of loans

It offers loans for the purchase of homes as well as construction, improvement, and extension of homes. It provides plot loans for the purchase of plots in urban areas. It offers loans to NRIs and PIOs for purchase, construction, repair, and renovation of residential properties in India. It also offers CLSS loans under PMAY. PNB HFL has a unique loan called ‘Unnati’ with simplified loan procedures and a slew of customer friendly services.

Additionally, they offer non-housing loans such as commercial property loans, loans against property, loans for real estate developers, and lease rental discounting loans.

Awards

PNB HFL won the gold award in the ‘Home Loan Provider of the Year’ category at Outlook Money Awards 2019. ETBFSI Excellence Awards 2019 has awarded PNB HFL in both Best Customer Engagement Initiative of the Year and Best CSR Practice of the Year as well.

Conclusion

It is a well-known fact that Indians value ‘roti, kapda aur makaan’ over everything else. Most people dream of their own home and wonder how and when will their dream come true. It can be surmised that HFCs are a convenient source of financing one’s own dwelling. One gains many benefits like lenient rules regarding credit scores, higher loan amounts, and easy processing. Further, HFCs are well regulated and one need not worry about associating with the wrong kind of institution that might let them down. Hence, it is safe to state that people can rely on HFCs to fulfil their dreams. 

References

1. RBI Press Release: 2019-2020/419, available at https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=47871
2. Finance (No.2) Act, 2019, Act No. 23 of 2019
3. National Housing Bank Act, 1987, Act No. 53 of 1987
4. NHB (ND)/DRS/Policy Circular No.69/2014-15, available at https://test.nhb.org.in/Regulation/NHB(ND)-DRS-Policy-Circular-69-2014-15.pdf
5. List of HFCs granted Certificate of Registration (COR) with permission to accept public deposits, available at https://nhb.org.in/a-list-of-housing-finance-companies-granted/

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