Housing Finance Companies (HFCs)

Housing Finance Companies (HFCs) are specialized NBFCs that focus on financing housing and real estate-related needs. They play a pivotal role in promoting home ownership and housing development in India by providing loans for purchase or construction of residential properties.

HFCs extend home loans to individuals (for buying flats, houses, construction, home improvement, etc.) and also lend to developers/builders for residential projects (though with regulatory limits to avoid conflicts of interest).

Regulatory Framework

Historically, HFCs were regulated by the National Housing Bank (NHB) under the NHB Act, 1987 (NHB was a subsidiary of RBI focused on housing finance regulation and refinance). However, in 2019, the government amended laws to transfer regulatory oversight of HFCs to RBI.

Now HFCs are treated as a category of NBFC under the RBI’s regulation (with NHB serving largely as a refinance institution). This change was aimed at harmonizing regulation and supervision since some large HFCs had become systemically important (e.g., the IL&FS group had an HFC, and DHFL default in 2019 raised concerns in housing finance).

Definition of HFC

As per RBI’s norms, an HFC is defined as an NBFC whose financial assets in housing finance constitute at least 60% of its total assets (net of intangibles). “Housing finance” generally includes loans for:

• individual housing purchases or construction
• residential mortgages
• loans against property (for housing purposes)
• loans to builders for residential housing projects
• and other allied services (like interior works, repair).

Additionally, to ensure HFCs primarily serve individual home buyers, RBI has mandated that out of the total housing finance assets, at least 75% must be individual housing loans (retail loans) by a certain deadline (HFCs were given a phased timeline till March 2024 to reach this 75% target, with interim milestones of 60% by 2022, 70% by 2023). HFCs that do not meet these criteria will be treated as NBFC-Investment & Credit Companies going forward.

Capital Requirements

HFCs are subject to stricter entry capital norms than general NBFCs. After regulatory changes, the minimum Net Owned Funds (NOF) for HFCs is ₹25 crore (raised from the earlier ₹10 crore requirement).

Existing HFCs were given time to increase capital in phases – for instance, ₹15 crore by March 2022, ₹20 crore by March 2023, and ₹25 crore by March 2024.

This ensures only well-capitalized players remain, enhancing sector stability. HFCs, like NBFCs, must maintain a Capital to Risk-Weighted Assets Ratio (CRAR) of at least 15% (with a minimum Tier-I capital of 10%). They also follow the 90-day NPA classification norm (loans overdue by more than 90 days are non-performing, aligning with banks).

Deposit-taking and Funding

Some HFCs accept public deposits (they function akin to NBFC-D if granted such permission). For example, large HFCs like LIC Housing Finance or (formerly) HDFC Ltd took deposits from the public offering competitive interest rates.

Such deposit-taking HFCs (HFC-D) must comply with additional rules: maintaining specified liquid assets, tight limits on deposit amounts relative to net owned funds, and mandatory credit ratings. Most HFCs, however, fund their lending primarily through other means – bank lines of credit, refinancing from NHB or other apex bodies, issuing debentures and bonds (including affordable housing bonds, etc.), and securitization of home loan portfolios. The ability to tap long-term debt markets is crucial for HFCs due to the long tenure of housing loans (often 10-20 years).

Role and Significance

HFCs have contributed enormously to expanding housing in India:

• They have improved access to home loans, even in smaller towns and for borrowers who might not have a banking history. Many HFCs specialize in affordable housing loans – small ticket loans to low-income borrowers (aligned with schemes like Pradhan Mantri Awas Yojana).
• HFCs often offer flexible loan structures and personalized service (e.g. doorstep service), making the borrowing process easier for customers. They compete with banks on interest rates and often provide quicker approvals by focusing solely on housing.
• They partner with developers for project financing and sometimes for marketing home loans to project buyers, thus fueling real estate growth.
• NHB Refinance & Support: HFCs can avail refinancing from NHB for certain priority segments (like rural housing). There are also credit guarantee schemes (e.g., Credit Risk Guarantee Fund Trust for Low Income Housing) that help HFCs lend to riskier borrowers by securing partial guarantees.

Regulatory Norms and Consumer Protection

RBI has aligned many HFC norms with those of banks:

• Interest Rates: HFCs, like banks, have to transparently publish interest rates (many follow a benchmark lending rate or Prime Lending Rate system for transparency). They cannot charge prepayment or foreclosure penalties on floating rate home loans to individual borrowers. This rule (in effect since NHB’s time) allows borrowers to refinance or repay early without extra cost, encouraging competition and fairness.
• Loan to Value (LTV) Limits: HFCs must adhere to LTV caps for housing loans (for example, maximum 80% LTV for large housing loans above a certain amount, and up to 90% for smaller loans). This ensures borrowers have equity in the property and limits over-leverage.
• Collective Investment Schemes Prohibition: HFCs cannot fund housing by raising money through schemes that resemble chit funds or collective investment (some shady firms in past took public money promising housing plots or flats – those are not HFCs and are illegal if not regulated).
• Builder Exposure Norms: To avoid conflicts of interest and excessive risk, RBI has instructed that if an HFC is lending to a builder in its group for a project, it should not lend to individual home buyers in the same project (choose either project lending or retail in-group project, but not both). Also, there are related-party exposure limits (e.g. an HFC’s exposure to its own group real estate companies is capped at a fraction of its funds).

Major HFCs and Market

Over time, the HFC sector has grown significantly. Notable HFCs have included HDFC Ltd, LIC Housing Finance Ltd, PNB Housing Finance, Indiabulls Housing Finance, L&T Housing Finance, etc. (HDFC Ltd was the largest HFC in India, and in a landmark development, it merged with HDFC Bank in 2023, reflecting convergence of housing finance with banking for growth and stability). The HFC industry’s loan book runs into several trillions of rupees, making it a substantial part of India’s financial system. HFCs collectively command a large share of the housing loan market alongside banks – often roughly 35-40% of outstanding housing loans are with HFCs, the rest with banks. This underscores their importance in achieving housing goals for the country.

Housing Sector Initiatives

The government and RBI use HFCs as key channels for housing initiatives:

• Under Priority Sector Lending (PSL) norms, banks can fulfill part of their targets by lending to HFCs for on-lending to housing (within certain loan size limits, e.g. housing loans up to ₹35 lakh in metropolitan areas for properties of values up to ₹45 lakh qualify as affordable housing).
• NHB often launches refinance schemes through HFCs for rural housing, low-income housing, etc., providing them cheaper funds to pass on to borrowers.

Pradhan Mantri Awas Yojana – Credit Linked Subsidy Scheme (CLSS): HFCs were active participants in this scheme where eligible home loan borrowers in EWS/LIG and MIG segments got interest subsidies on housing loans. HFCs helped identify beneficiaries and process subsidies via NHB.