Non-consideration of acquired or transferred home loans for HFC principality test

-Financial Services Division (finserv@vinodkothari.com)

The RBI issued Master Directions for HFCs on August 13, 2019. The Master Directions define an HFC as one which is principally engaged in the business of providing housing finance. To prove the principality of business, an HFC must have at least 60% of its total assets deployed in the housing finance business, and 50% of its total assets must be deployed in individual housing finance.

Certain leading HFCs in the market have not included acquired housing finance assets in the computation of PBC. This practice is based on the RBI’s stance of not allowing HFCs to count housing loans acquired through direct assignment as a part of housing finance assets. 

Interestingly, as informed by the HFCs, the RBI is also not allowing the originator to count the assets as a part of its housing finance assets once they are sold. Therefore, this leads to a conundrum, housing loans assigned are neither counted as housing finance assets in the books of the seller nor in the books of the buyer.

A representation was made by the Indian Securitisation Foundation requesting the RBI to provide a clarification regarding the inclusion of acquired housing finance assets in the computation of PBC, which has been turned down by the RBI. 

This is likely to have an adverse impact on the secondary market for housing loan loans which is not in line with the admitted policy of encouraging the secondary market in home loans.

In the same line of argument, where home loans have been securitised, they will be removed from the home loan book for the purpose of principality test, both for the originator and for the investor.

The above stand taken by the RBI is ununderstandable, since a direct assignment is nothing but an inorganic way of creating a home loan book. Even for the purpose of priority sector lending requirements, loans acquired by way of direct assignment are taken as priority sector loans in the hands of the buyer, based on their original eligibility for the same.

See representation made to the RBI here- https://indiansecuritisation.com/product1/21642683272.pdf