Regulatory wrinkles should be ironed out to give HFCs a better deal: Parekh

Housing finance companies (HFCs) need to get better terms including a level playing field in regulations vis-a-vis banks as accounting standards are different. Also, regulators should address the issue of loan takeovers and rule that unintentionally require HFCs to maintain excess liquidity, said Deepak Parekh, chairman HDFC Ltd.

In communication to shareholders of Housing Development Finance Corporation (HDFC), Parekh said the current environment (COVID-19 pandmei) has proved that there can be no better protection for a borrower than home loan insurance and home insurance. Hence, insurance loans to the home loan customer should be considered as an integral component of a housing loan and be permitted to be classified accordingly, Parekh added.

Parekh said his personal view was that Regulation and supervision are critical functions in any financial system and it is important that trust between a regulator and regulatee is never compromised.

FY21 was the first transition year of housing finance companies (HFCs) being regulated by Reserve Bank of India (RBI). RBI has done well to create the Regulations Review Authority along with an advisory group for the same.

Regulatory clarity helps minimise potential conflicts. Often, there are differences in interpreting regulations. The non-banking financial companies, including HFCs, have been following Indian Accounting Standards (IndAS), which is still not aligned with the prudential guidelines. This results in differences in opinions between the inspection teams, regulated entities and even the auditors, he said.

Banks and insurance companies have not migrated to IndAS, but it has been three years since NBFCs have. While this isn’t a level playing field, it may be prudent to at least resolve these open-ended issues sooner than later, Parekh added.

Another niggling point for HFCs is retention of customers. Lenders are susceptible to losing their existing customers to other players who often lure them through lower interest rates or increased loan amounts. As there are no prepayment penalties on floating rate loans, a lender can take over a home loan rather effortlessly.

The regulatory framework in its current form may have the unintended consequence of penalising a HFC for maintaining excess liquidity. While they maintain excess funds as a matter of abundant caution, it should not become a hindrance to business activity.

A minor tweak which could exclude surplus liquid balances from total assets to arrive at prescribed limits would go a long way in helping HFCs, he said.