Housing Finance Company Registration

What does Housing Finance Company mean?

The Housing Finance Companies are the companies who are engaged in its core business of financing the acquisition or construction of houses and are considered as a Non Banking Finance Company (NBFC) and are regulated by the National Housing Bank (NHB).

What does registration of Housing Finance Company mean?

Acquiring a Certificate of Registration prior undertaking the activities related to housing finance is necessary for every proposed housing finance company according to the section 29A of the National Housing Bank Act, 1987.

Under the provisions of the National Housing Bank Act, 1987, it shall be considered as an offence and shall be punishable in case conducting activities without obtaining the certificate of registration. Winding up of such Housing Finance Company can be done by the National Housing Bank through filing application under section 33B of the said Act.

Who is the regulatory body for Housing Finance Company?

NBH plays the most vital role in the Housing Finance market. The housing finance industry in India has reached the second development phase in terms of convergence with the equity and capital markets.

In order to sustain the reputation and sustainability of the country's housing finance sector in terms of resource growth, policy development and organization building, the NHB has built an efficient reactive regulatory framework. This has been done to ensure that the free market approach remains uninterrupted.

Below mentioned are the guidelines for Housing Finance Companies which has been introduced by the National Housing Bank:-

  • Assistance regarding to finance;
  • Prudential norms for income recognition;
  • Classification of Assets;
  • Regulating deposits taking activity etc.

A coordination between the State, Reserve Bank of India (RBI) and National Housing Bank (NHB) there is a need to materialize this market.

RBI regulates - lending to the housing by Banks

NHB regulates - lending to the housing by HFCs

What requirements are need to complied with in order to obtain the Housing Finance Company license in India?

The National Housing Bank (NHB) governs the Housing Finance Companies (HFC) in India. Below mentioned requirements are required to be fulfilled by the Housing Finance Companies as per the Section 29A of the National Housing Bank Act, 1987 in order to conduct the housing finance business. -

Registration under the Companies Act 1956 / 2013 must be obtained by the company who are interested in conducting the business of a Housing Finance for the community at large;

It must have the key objective of providing funding for housing or accommodation in any manner, whether directly or indirectly;

Minimum net owned fund of INR 10 crore is required to maintain;

Which documents are required to be submitted for registration of Housing Finance Company in India?

In order to obtain the registration for Housing Finance Company, following documents are required to be provided:

  • Certified Copy of MOA (Memorandum of Association) & AOA (Article of Association) are required to be submitted;
  • In favor of National Housing Bank, New Delhi, Demand Draft of Rs. 10,000/- shall be issued;
  • Board Resolution shall be conducted which specifies the objective of the Company and authorization to file Application before NHB;
  • Professionals are required to submit the Certificate specifying the criteria of meeting the minimum NOF (Net Owned Fund) of Rs. 10 crores;
  • Next 3 years business Plan of the company shall be disclosed;
  • Profile of the Company;
  • Managing Directors/Directors/CEO’s Business Profile etc;
  • Last three years audited financial statements, if available;
  • Education and experience certificate of directors and employees;
  • Source of the capital of the company shall be disclosed by the professional through the certificate;
  • Company’s details in which promoters/ directors, associated;

What processes are to be followed for obtaining the Housing Finance Company registration?

An applicant is required to submit the application’s physical copy (in duplicate) as well as the relevant documents which are listed above to the Head Office of the “National Housing Bankâ€Â and the Demand Draft of Rs. 10,000/- in favor of National Housing Bank payable (NHB) at New Delhi for obtaining the registration under Housing Finance Company.

What conditions laid down by the NHB related to the grant of Housing Finance Company license?

Once a request for registration has been received, the NHB (National Housing Board) must examine the application and issue a Certificate of Registration after proper background confirmation in accordance with the following conditions as set out in subsection (4) of Section 29A of the NHB Act, 1987:

  • HFC is or will be in a place to pay the current or future depositors in full as and when their claims arise.
  • The corporate activities of the Housing Finance Company are not or are not expected to be carried out in a way that is detrimental to the interests of its current or future depositors.
  • The activities and practices of the company must not be outside the public interest or the security of the depositors.
  • HFC must have sufficient capital structure and better earnings prospects.
  • Public interest shall be protected as soon as the certificate of registration is given to HFC for the commencement and conduct of business in India.
  • Any other requirement that, in the estimation of the NHB, is essential to ensure that the commencement or behavior of an HFC company in India does not disadvantage the public interest or the depositors' interest.

What is the difference between Housing Finance Companies and Banks?

Most of the activities of banks and HFCs are similar but there are few differences involved which the mentioned below:

  • Demand deposits cannot be accepted  by the HFCs;
  • Payment and settlement process are not carried out by the HFCs and cannot issue self cheques;
  • Deposit insurance facility and Credit Guarantee Company, unlike banks, is not applicable for HFC depositors.

What conditions laid down by the NHB related to the cancellation of Housing Finance Company license?

Where any HFC has failed to comply with the guidelines as lay down by the NHB or NHB act, certificate of registration granted to a housing finance company can be revoked.

However, cancellation is subject to certain provisions, if such company

  • Cessation of the finance industry in India;
  • HFC has failed to comply with the following terms and condition prescribed by the National Housing Bank (NHB):

a) Complying with any directions given by the National Housing Bank pursuant to Chapter V of the 1987 National Housing Bank Act; or

b) Maintaining accounts in compliance with the provisions of any law or regulation or writ petition by the National Housing Bank pursuant to Chapter V of the National Housing Bank Act 1987; or

c) Compulsory to file the books of accounts and other appropriate documents / papers in compliance with the NHB Act, as ordered by the National Housing Bank Inspecting Authority; or

d) The approval of the deposit by order of the National Housing Bank pursuant to this Chapter V of the National Housing Bank Act, 1987 has been restricted and has been in effect for a period of not less than 3 months.

What post-incorporation requirements are required to be complied by Housing Finance Company?

Housing finance firms need to fulfill the following post-registration formalities in order to operate smoothly after successfully obtaining the Certificate of Registration:

  1. Development of loan processes;
  2. Development of loan policies, including appraisal techniques & tools;
  3. IT Infrastructure Development;
  4. Board Structure;
  5. Organizational Structure and Drafting of Policies;
  6. Development of Product;
  7. Legal Operations;
  8. NHB regulatory and compliance requirements;
  9. Mobilization of resources
  10. Credit Risk Management;
  11. Scoring Model;
  12. Management Information System (MIS) format;

What compliances have been made compulsory for housing Finance Companies towards NHB?

Below mentioned are the compliances which are required to be adhered by Housing Finance Companies:

  • Every HFC is required to submit an annual return, a half-yearly return and a quarterly return on prudential standards, and the maintaining of liquid assets, respectively;
  • Annual submission of the certificate of auditor and verifying the ability of the HFC to repay the deposits.;
  • Financial Statement and Annual Report’s Copy;
  • • Timely return in respect of changing of registered office, change of management, directors etc.
  • Filing a copy of an advertising seeking public deposits or a statement to the position of public deposits.
  • IND-AS provisions must be complied by the HFCs.

How Net Owned Fund (NOF) is calculated for Housing Finance Company Registration?

The sum of the paid-up share capital and the free reserves as reported in the most current housing finance agency balance sheet after the elimination of the following:

  • Accumulated losses;
  • Deferred revenue expenditure;
  • Other intangible assets.

Further eliminating the amount which represents the investments of such companies in the shares of the following:

  • Its subsidiaries;
  • Companies in the same group;
  • All other housing finance institutions which are companies; and

The book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to and deposits with the following:

  • Subsidiaries of such company; and
  • Companies in the same group, to the extent such amount exceeds ten percent of the above;