Posts

Recent Updates to HFC Directions: What you need to know

-Chirag Agarwal | chirag@vinodkothari.com

On October 10, 2024, RBI updated the Master Direction – Non-Banking Financial Company – Housing Finance (‘HFC Directions’) applicable to HFCs. The HFC Directions were updated to consolidate various circulars that have been issued since its last update on March 21, 2024. A significant change in this edition is the introduction of a new format for the Most Important Terms and Conditions (MITC) following the rollout of the Key Facts Statement (KFS) vide circular no DOR.STR.REC.13/13.03.00/2024-25 dated April 15, 2024. 

In this article, we will be discussing the changes introduced by the October 10th update to the HFC Directions.

Clarification regarding MITC and KFS

Previously, Para 85.8 of the HFC Directions mandated that to facilitate a quick, and better understanding of the terms and conditions of the housing loan,  a document containing the ‘Most Important Terms and Conditions’ (MITC) must be furnished to the borrower. However, when the KFS circular was first introduced, there was some ambiguity regarding whether both the MITC and KFS would apply to HFCs. This confusion arose because both disclosures contained overlapping information. However, with the recent updates to the HFC Directions on October 10, 2024, clarity has been provided on this matter. The revised regulations clearly state that “the HFCs shall additionally obtain a document containing the other most important terms and conditions (MITC) of such loan (i.e., other than the details included in KFS)”. 

Notably, the MITC has now been renamed as Other Most Important Terms and Conditions (‘OMITC’). The OMITC will no longer include disclosures that are already covered in the KFS. The revised format no longer includes an obligation to disclose details of the loan amount, interest rate, type of interest, details of moratorium, date of reset of interest, installment type, loan tenure, the purpose of the loan, fees and other charges, as well as the details of the grievance redressal mechanisms now exclusively appear in the KFS. Further, other substantive aspects have been retained, i.e., details of the security/collateral for the loan, details of the insurance, conditions for disbursement of the loan, repayment of the loans and interest,  procedure to be followed for recovery, the date on which annual outstanding balance sheet will be issued, and details of the customer services.

This updated approach simplifies the compliance process for HFCs by clearly defining where specific information should be disclosed. It reduces redundancy and ensures that borrowers can find critical information in a consolidated format without surfing through repetitive disclosures. 

Consolidation of Circulars

The following circulars and notifications have been consolidated under the HFC Directions pursuant to the update:

Details of circulars consolidatedOur resources on the topic
Key Facts Statement (KFS) for Loans & AdvancesThe Key to Loan Transparency: RBI frames KFS norms for all retail and MSME loans
Master Directions on Fraud Risk Management in Non-Banking Financial Companies (NBFCs) (including Housing Finance Companies)Revamped Fraud Risk Management Directions: Governance structure, natural justice, early warning system as key requirements
Guidance Note on Operational Risk Management and Operational ResilienceRisk Management Function of NBFCs – A Need to Integrate Operational Risk Management & Resilience
Review of Risk Weights for Housing Finance Companies (HFCs)HFCs: risk weights for undisbursed home loans rationalised
Investments in Alternative Investment Funds (AIFs)Some relief in RBI stance on lenders’ round tripping investments in AIFs
Frequency of reporting of credit information by Credit Institutions to Credit Information Companies

Conclusion 

To summarise, the recent updates to the HFC Directions not only consolidate past circulars but also clarify the relationship between the MITC and KFS. HFCs can now navigate their disclosure requirements more effectively, enhancing transparency and making it easier for consumers to understand the terms of their loan.

Our other resources on the topic are:-

  1. Aligning Regulations: Harmonizing the Frameworks for HFCs and NBFCs
  2. Housing finance companies regulatory framework: RBI proposes sectoral harmonisation
  3. HFCs: risk weights for undisbursed home loans rationalised

Harmonising computation for concentration limits across NBFCs

– Kaushal Shah, finserv@vinodkothari.com 

Reserve Bank of India (RBI) has recently announced amendments to the Credit and Investment concentration norms, specifically targeting Base and Middle Layer Non-Banking Financial Companies (NBFCs). The circular, dated January 15, 2024, brings about notable changes aimed at ensuring uniformity and consistency across NBFCs while computing the concentration norms. 

What has RBI done?

For Middle Layer NBFCs (NBFC-MLs) :

  1. In addition to the use of Credit Default Swaps (‘CDS’), RBI has now allowed NBFC MLs to offset the aggregate exposure with the following additional Credit Risk Transfer (CRT) instruments: 
  • Cash margin/caution money/security deposit held as collateral on behalf of the borrower against the advances for which right to set off is available;

It is pertinent to note that, as per para 84 of the SBR Directions, already requires the NBFC for the purpose of assignment of risk weight to net off the amount of cash margin/ caution money/security deposits held as collateral against the advances out of the total outstanding exposure of the borrower. 

  • Central Government guaranteed claims which attract 0 per cent risk weight for capital computation;
  • State Government guaranteed claims which attract 20 per cent risk weight for capital computation; and 
  • Guarantees issued under Credit guarantee Schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises, Credit Risk Guarantee Fund Trust for Low Income Housing and individual schemes under National Credit Guarantee Trustee Company Ltd
Read more

NHB Master Circular on HFC Returns

– Team Finserv | finserv@vinodkothari.com

Relevant Links:

  1. NHB Master Circular dated December 31, 2021
  2. Formats of the returns and statements specified in the Master Circular
  3. ORMIS Portal
  4. HFC Manual for filing on ORMIS Portal
  5. Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021