Move to separate HFC regulation and supervision welcome, say experts

There are talks about two debt managers- one, internal (the RBI), and a government entity for the external

The move to segregate regulation and supervision of housing finance companies (HFC) may seem odd and counterproductive at first, but experts see it as a welcome and practical move.
 
After the Budget, the regulation of HFCs will reside with the Reserve Bank of India (RBI), while supervision will continue with the National Housing Bank (NHB). This is not the first time in the local financial system that one entity is reporting to two separate bodies; it might also not be the last.
 
With an external sovereign bond issuance coming up, there are already talks about two debt managers for the country — one, internal (the RBI), and a government entity for the external.
 
Analysts say that taking away the regulation of HFCs was the right move, considering that the NHB had largely failed to effectively regulate the sector. The sector is going through an acute liquidity deficit, and extending a credit line through banks would not have been possible for the RBI (assuming it were to be given), if HFCs were not under the RBI.
 
But then, it is also possible that the RBI takes advantage of this to get the regulation back into its fold. Till April, it was the owner of the NHB (its stake has now been transferred to the Centre), and an RBI executive director still sits on its board.
 
It is also a fact that the RBI simply doesn’t have many boots on the ground (read: inspectors) to check the books of the 82 HFCs registered with the NHB. Many of them are too small and have questionable accounting standards that do not adhere to the standard practice at the larger firms.
 

“Policies can be framed from Mumbai, but to properly inspect these companies, you need to visit their branches. The RBI just doesn’t have that many people,” said an RBI executive, adding that the model was not inspired by global practices in which there are two financial authorities.
 
For example, in the UK, you have the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). The PRA is the ‘prudential regulator’ for banks; FCA is the ‘conduct regulator’. The two bodies superseded the Financial Services Authority in 2013. Then, there is the Bank of England, which is the monetary authority. In the case of RBI, it is three merged in one. And so, it is called a “full service central bank” by the Bank for International Settlement (BIS), a decision-making body for global central banks.
 
Though not exactly the same, the government’s move with HFCs would more or less mirror the situation prevailing in the UK.
 
At the same time, in the case of cooperative banks and regional rural banks, the RBI is the regulator, while the National Bank for Agriculture and Rural Development is the supervisor.
 
Shortage of manpower for inspection purpose has forced the central bank to raise a dedicated supervisory cadre. “With a view to strengthening the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies (NBFCs), the board decided to create a specialised supervisory and regulatory cadre within the RBI,” a press statement by the RBI said in May, after its central board met in Chennai.
 
RBI observers, too, do not see an issue with this duality. If the RBI is already managing NBFCs, it is only natural that it would want to formulate the policies for HFCs as well, which is basically another form of an NBFC.
 
“The weak link here, though, is the capability of NHB inspectors who, frankly, may not be at par with the RBI’s cadre. In the past, even analysts writing critical notes on certain large HFCs have been hounded by the management without any help from the NHB. You don’t see that happening often with banks,” said a senior analyst who did not want to be named. The analyst hoped that with RBI being the regulator, the clout of a few HFCs will get considerably dented.