RBI may get regulatory powers over HFCs; NHB to be in charge of supervision

The government is planning to amend the Banking Regulation Act to give more teeth to the central bank

The government is considering shifting the regulation of housing finance companies (HFCs) from the National Housing Board (NHB) to the Reserve Bank of India (RBI), according to sources familiar with the development. The NHB, which has an RBI executive director as its board member, will, however, continue to supervise the HFCs, the sources added. 

There are 82 HFCs in India, but more than 90 per cent of the housing finance market is controlled by the top five companies. Except a few such as Housing Development Finance Corporation (HDFC), India’s largest mortgage financier, others have either slowed or stopped disbursing loans due to liquidity crunch. Dewan Housing Finance Corporation (DHFL), one of the largest HFCs, has witnessed financial stress in recent months, leading to delays in meeting its commercial paper obligations.

The government is also planning to amend the Banking Regulation (BR) Act to give more teeth to the central bank. If there are conflicting regulations on the same issue, the BR Act will supersede the others, the sources said. 

The RBI could also be empowered to change the management, and boards of non-banking financial companies (NBFCs), a power that it currently enjoys with respect to private sector banks. This has already been done in the case of cooperative banks, which are also regulated by state rules. The RBI has the powers to execute changes in cooperative banks, but it doesn’t have the same powers for nationalised banks owned by the central government.

While a change in management of an NBFC requires the RBI’s nod, the central bank cannot initiate changes in management. With the proposed change, the RBI will have overarching powers over NBFCs and HFCs, which are currently facing a huge solvency and liquidity crisis.

Finance Minister Nirmala Sitharaman may announce these changes in the Budget, and considering the ruling BJP’s numbers in both Houses of Parliament, these could be passed without any hassle.

Sitharaman informed Parliament on Monday the government was planning to give more powers to the central bank to regulate the NBFC sector. However, she ruled out infusing funds into privately held NBFCs, even as the RBI was closely monitoring the NBFC situation.

“The government has received a proposal from the RBI to strengthen the RBI’s regulatory and supervisory powers under the Reserve Bank of India Act, 1934, and the same is under consideration,” Sitharaman said.

Till April this year, the NHB was fully owned by the RBI. But the government took control of the housing finance regulator on April 29. So, in a way, HFCs being regulated by the RBI would not be alien waters for the banking regulator. This is also no way creating a super regulator, but an arrangement where primary rules are set by the RBI and supervised by the housing regulator, clarified a person familiar with the matter.

Although the contours are not clear yet, it could also happen that all regulations made by the NHB have to be in consultation with the RBI.

Shaktikanta Das, the RBI governor, said in his post-monetary policy conference last month that even as housing finance firms were not regulated by the central bank, it was keeping close vigilance on the development in the sector. 

Sources say a possible credit line for the sector is not being made possible because the RBI cannot do so as long as the NHB remains the regulator. Once the RBI gets the regulatory powers over HFCs, it will be able to extend a credit line in the form of liquidity window available to banks.