RBI to regulate housing finance firms soon

RBI will soon get power to regulate housing finance companies (HFCs), which will almost certainly lead to the lenders facing stringent asset quality reviews, informed sources. However, this might lead to major repercussions for about 80 HFCs, including Indiabulls Housing Finance Ltd, Housing Development Finance Corporation and Dewan Housing Finance Corporation as they might face unprecedented scrutiny and the potential for major financial penalties and restriction on their activities if improper practices are discovered.

RBI, in late 2015, has started a similar review of bank assets amid allegations that lenders were hiding the extent of the bad debts on their books. During reviews of banks, the RBI had revealed a wide range of areas where lenders were under reporting their bad loans. It initially led to financial penalties for some lenders and eventually fed into decisions to impose tougher restrictions on their loan books while their bad debts remained high.

The housing finance companies, which are part of the broader shadow banking sector known as non-banking finance companies (NBFCs), are currently regulated by the National Housing Board, and the central bank has no direct authority over them. The other NBFCs are very loosely regulated, with various regulators including the RBI having some role but no one being fully accountable.

The RBI’s oversight of HFCs will be a step towards the Indian authorities getting a firmer grip on the risky shadow banking sector that will help to contain any systemic problems. A series of debt defaults last year by major infrastructure financing group, Infrastructure Leasing and Financial Services (IL&FS), showed that much of the sector was highly leveraged. “There will be substantial improvement in regulation and supervision of all entities including NBFCs and HFCs once RBI has direct control over the housing finance firms,” one of the sources said.