Ozg Regulatory Affairs Consultant

Ozg Registration, Approval & Licensing Group

Ozg Center | Delhi | Mumbai | Kolkata | Chennai

Phone # 0091-98.11.41.58.31-37-61-72-84-92-94

Website: RBIapproval.com

Email: license.consultant@ozg.co.in

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Income recognition

22. (1) Income recognition shall be based on recognised accounting principles.

(2) Income including interest/discount or any other charges on NPA shall be recognised only when it is actually realised. Any such income recognised before the asset became non-performing and remaining unrealised shall be reversed.

(3) In respect of hire purchase assets, where instalments are overdue for more than twelve months, income shall be recognised only when hire charges are actually received. Any such income taken to the credit of profit and loss account before the asset becoming non-performing and remaining unrealised, shall be reversed.

(4) In respect of lease assets, where lease rentals are overdue for more than twelve months, the income shall be recognised only when lease rentals are actually received. The net lease rentals taken to the credit of profit and loss account before the asset became non-performing and remaining unrealised shall be reversed.

Explanation: For the purpose of this paragraph, ‘net lease rentals’ mean gross lease rentals as adjusted by the lease adjustment account debited/credited to the profit and loss account and as reduced by depreciation at the rate applicable under schedule XIV of the Companies Act, 1956

Income from investments

23.(1) Income from dividend on shares of corporate bodies and units of mutual funds shall be taken in to account on cash basis:

Provided that the income from dividend on shares of corporate bodies may be taken into account on accrual basis when such dividend has been declared by the corporate body in its annual general meeting and the housing finance company’s right to receive payment is established.

(2) Income from bonds and debentures of corporate bodies and from Government securities/bonds may be taken into account on accrual basis:

Provided that the interest rate on these instruments is predetermined and interest is serviced regularly and is not in arrears.

(3) Income on securities of corporate bodies or public sector undertakings, the payment of interest and repayment of principal of which have been guaranteed by the Central Government or a State Government may be taken into account on accrual basis.

Accounting standards

24. Accounting Standards and Guidance Notes issued by the Institute of Chartered Accountants of India (referred to in these directions as “ICAI”) shall be followed insofar as they are not inconsistent with any of these directions.

Accounting for investments

25. (1) (a) The board of directors of every housing finance company shall frame investment policy for the company and implement the same;

(b) The criteria to classify the investments into current and long term investments shall be spelt out by the Board of the company in the investment policy;

(d) (i) There shall be no inter-class transfer on ad-hoc basis;

(ii) The inter-class transfer, if warranted, shall be effected only at the beginning of each half year, on April 1 or october1, with the approval of the Board;

(iii) The investments shall be transferred scrip wise, from current to long-term or vice-versa, at book value or market value, whichever is lower; and

(iv) The depreciation, if any, in each scrip shall be fully provided for and appreciation, if any, shall be ignored;

(v) The depreciation in one scrip shall not be set off against appreciation in another scrip at the time of such inter-class transfer, even in respect of the scrip of same category.

(2) A long term investment shall be valued in accordance with the Accounting Standard issued by ICAI.

(3) Quoted current investments shall, for the purpose of valuation, be grouped into the following categories, viz.,

(a) equity shares,

(b) preference shares,

(d) Government securities including treasury bills,

(e) units of mutual fund, and

(f) others.

Quoted current investments for each category shall be valued at cost or market value, whichever is lower. For this purpose, the investments in each category shall be considered scrip-wise and the cost and market value aggregated for all investments in each category. If the aggregate market value for the category is less than the aggregate cost for that category, the net depreciation shall be provided for or charged to the profit and loss account. If the aggregate market value for the category exceeds the aggregate cost for the category, the net appreciation shall be ignored. Depreciation in one category of investments shall not be set off against appreciation in another category.

(4) Unquoted equity shares in the nature of current investments shall be valued at cost or breakup value, whichever is lower. Where the balance sheet of the investee company is not available for two years, such shares shall be valued at one rupee only.

(5) Unquoted preference shares in the nature of current investments shall be valued at cost or face value or the net asset value whichever is less. In case the net asset value is negative or the balance sheet of the investee company is not available for two years, it should be valued at rupees one per company.

(6) Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying cost.

(7) Unquoted investments in the units of mutual funds in the nature of current investments shall be valued at the net asset value declared by the mutual fund in respect of each particular scheme.

(8) Commercial papers shall be valued at carrying cost.

Note: Unquoted debentures shall be treated as term loans or other type of credit facilities depending upon the tenure of such debentures for the purpose of income recognition and asset classification.

Need for Policy on Demand/ Call Loans

26. (1) The Board of Directors of every housing finance company granting/intending to grant demand/call loans shall frame a policy for the company and implement the same.

(2) Such policy shall, inter alia, stipulate the following, -

(i) A cutoff date within which the repayment of demand or call loan shall be demanded or called up;

(ii) The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if the cutoff date for demanding or calling up such loan is stipulated beyond a period of one year from the date of sanction;

(iii) The rate of interest which shall be payable on such loans;

(iv) Interest on such loans, as stipulated shall be payable either at monthly or quarterly rests;

(v) The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if no interest is stipulated or a moratorium is granted for any period;

(vi) A cut-off date, for review of performance of the loan, not exceeding six months commencing from the date of sanction;

(vii) Such demand or call loans shall not be renewed unless the periodical review has shown satisfactory compliance with the terms of sanction.

Asset classification

27. (1) Every housing finance company shall, after taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation, classify its lease/hire purchase assets, loans and advances and any other forms of credit into the following classes, namely :-

(i) Standard assets;

(ii) Sub-standard assets;

(iii) Doubtful assets; and

(iv) Loss assets.

(2) The class of assets referred to above shall not be upgraded merely as a result of rescheduling, unless it satisfies the conditions required for the upgradation.

^[Loan to Value (LTV) Ratio

27A. No housing finance company shall (i) grant housing loans upto Rs 20 lakh to individuals with LTV ratio exceeding 90% and (ii) grant all other housing loans above Rs 20 lakh to individuals with LTV ratio exceeding 80%.^][1]

Provisioning requirement

28. Every housing finance company shall, after taking in to account the time lag between an account becoming non-performing, its recognition as such, the realisation of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets as provided hereunder:-

^[Loans, Advances and Other Credit Facilities Including Bills Purchased and Discounted

(1) The provisioning requirement in respect of loans, advances and other credit facilities including bills purchased and discounted shall be as under:-

(i) Loss Assets

The entire assets shall be written off. If the assets are permitted to remain in the books for any reason, 100% of the outstandings shall be provided for.

(ii) Doubtful Assets

(a) 100% provision to the extent to which the advance is not covered by the realisable value of the security to which the housing finance company has a valid recourse shall be made. The realisable value is to be estimated on a realistic basis;

(b) in addition to item (a) above, depending upon the period for which the asset has remained doubtful, provision to the extent of 25% to 100% of the secured portion (i.e. estimated realisable value of the outstandings) shall be made on the following basis:-

Period for which the asset has been considered as doubtful

% of provision

Up to one year

One to three years

More than three years

100

(iii) Sub-standard Assets

A general provision of 15% of total outstanding shall be made

(iv) Standard Assets

(a)

Standard Assets in respect of housing loans at teaser/special rates i.e. housing loans at comparatively lower rates of interest in the first few years after which rates are re-set at higher rates.

2% provision on the total outstanding amount of such loans. The provisioning of these loans to be re-set after one year at the applicable rates from the date on which the rates are re-set at higher rates if the accounts remain ‘standard’.][2]

[(b)

(c)

Standard Assets in respect of commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction etc.)

Standard Assets in respect of all loans other than (a) & (b) above

1.00% on the total outstanding amount of such loans

A general provision of 0.4% of the total outstanding amount of loans which are standard assets shall be made][3]

Lease and hire purchase assets

(2) The provisioning requirements in respect of hire purchase and leased assets shall be as under:-

Hire purchase assets

(i) In respect of hire purchase assets, the total dues (overdue and future installments taken together) as reduced by the finance charges not credited to the profit and loss account and carried forward as unmatured finance charges and the depreciated value of the underlying asset, shall be provided for.

Explanation

For this purpose, the depreciated value of the asset shall be notionally computed as the original cost of the asset to be reduced by depreciation at the rate of 20 percent per annum on a straight line method. In the case of second hand asset, the original cost shall be the actual cost incurred for acquisition of such second hand asset.

Additional provision for Hire Purchase and Leased assets

(ii) In respect of hire purchase and leased assets, additional provision shall be made as under :

(a) Where any amounts of hire charges or lease rentals are overdue up to 12 months

Nil

(b) Where any amounts of hire charges or lease rentals are overdue for more than 12 months but up to 24 months

10% of the net book value

40% of the net book value

(d) Where any amounts of hire charges or lease rentals are overdue for more than 36 months but upto 48 months

70% of the net book value

(e) Where any amounts of hire charges or lease rentals are overdue for more than 48 months

100% of the net book value

(iii) On expiry of a period of 12 months after the due date of the last installment of hire purchase/ leased asset, the entire net book value shall be fully provided for.

NOTES

(1) The amount of caution money/margin money or security deposits kept by the borrower with the housing finance company in pursuance of the hire purchase agreement may be deducted against the provisions stipulated under clause (i) above, if not already taken into account while arriving at the equated monthly installments under the agreement. The value of any other security available in pursuance to the hire purchase agreement may be deducted only against the provisions stipulated under clause (ii) above.

(2) The amount of security deposits kept by the borrower with the housing finance company in pursuance to the lease agreement together with the value of any other security available in pursuance to the lease agreement may be deducted only against the provisions stipulated under clause (ii) above.

(3) It is clarified that income recognition on and provisioning against NPAs are two different aspects of prudential norms and provisions as per the norms are required to be made on NPAs on total outstanding balances including the depreciated book value of the leased asset under reference after adjusting the balance, if any, in the lease adjustment account. The fact that income on NPA has not been recognised cannot be taken as reason for not making provision.

(4) An asset which has been re-negotiated or rescheduled as referred to in paragraph 2(1)(zc) of these directions shall be a sub-standard asset or continue to remain in the same category in which it was prior to its re-negotiation or reschedulement as a doubtful asset or a loss asset as the case may be. Necessary provision is required to be made as applicable to such asset till it is upgraded. In case where an asset has been rescheduled on account of natural calamities having impaired the repaying capacity of the borrower as provided in second proviso to paragraph 2(1)(zc), any provisioning made prior to such rescheduling shall neither be written back nor adjusted against any provisioning requirements that may arise in future.

(5) All financial leases written on or after April 1, 2002 attract the provisioning requirements as applicable to hire purchase assets.

^[(6) The general provision of 0.4%of the total outstanding amount of loans shall not be reckoned for arriving at net NPAs.

(7) The provisions towards Standard Assets need not be netted from gross advances but shown separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.^][4]

Disclosure in balance sheet

29. (1) Every HFC shall, separately disclose in its balance sheet the provisions made as per paragraph 28 above without netting them from the income or against the value of assets.

(2) The provisions shall be distinctly indicated under separate heads of accounts separately for housing and non-housing finance business and individually for each type of assets as under:-

(a) provisions for sub-standard, bad and doubtful and loss assets; and

(b) provisions for depreciation in investments

(3) Such provisions shall not be appropriated from the general provisions and loss reserves held, if any, by the housing finance company.

(4) Such provision for each year shall be debited to the profit and loss account. The excess of provisions, if any, held under the heads general provisions and loss reserves may be written back without making adjustment against them.

(5) Every housing finance company shall, separately disclose, in the ‘Notes on Accounts’ to the Balance Sheet in its next Annual Report,

(a) the details of the levy of penalty, if any, imposed on the housing finance company by the National Housing Bank; and

(b) adverse comments, if any, on the housing finance company made in writing by the National Housing bank on regulatory compliances, with a specific communication to the housing finance company to disclose the same to the public.

Requirement as to Capital Adequacy

30. (1) Every housing finance company shall, maintain a minimum capital ratio consisting of Tier-I and Tier-II capital which shall not be less than-

(i) ten percent on or before March 31, 2001; and

(ii) twelve percent [on or before March 31, 2002 and thereafter.

of its aggregate risk weighted assets and of risk adjusted value of off-balance sheet items.

(2) The total Tier-II capital, at any point of time, shall not exceed one hundred percent of Tier-I capital.

Explanations:

On balance sheet assets

(1) In these Directions, degree of credit risk expressed as percentage weightages have been assigned to balance sheet assets. Hence, the value of each asset/item requires to be multiplied by the relevant risk weights to arrive at risk adjusted value of assets. The aggregate shall be taken in to account for reckoning the minimum capital ratio. The risk weighted asset shall be calculated as the weighted aggregate of funded items as detailed hereunder:

Weighted risk assets - On balance Sheet items

% Weight

(1)

Cash and bank balances including fixed deposits and certificates of deposits with banks

(2)

Investments:

Approved securities as defined in the National Housing Bank Act, 1987

Bonds of public sector banks and fixed deposits/certificates of deposits/bonds of public financial institutions

Units of Unit Trust of India

Mortgage backed security, receipt or other security evidencing the purchase or acquisition by a housing finance company of an undivided right, title or interest in any debt or receivable originated by a housing finance company recognised and supervised by National Housing Bank or a scheduled commercial bank and secured by mortgage of residential immovable property, provided the conditions specified below in Note (4) are fulfilled.

Shares of all companies and debentures/bonds/ commercial papers of companies other than in b) above/units of mutual funds other than in c) above.

100

HFC’s investments in innovative perpetual debt of other HFCs/ banks/ financial institutions.

100

(3)

Housing/ Project Loans guaranteed by Central/ State Governments.

Note: Where guarantee has been invoked and the concerned Government has remained in default for a period of more than 90 days after the invocation of the guarantee, a risk weight of 100% should be assigned.

(b)(i) Housing loans sanctioned to individuals up to Rs. 30 lakhs secured by mortgage of immovable property, which are classified as standard assets with LTV Ratio is = or < 75%

^[(b)(ii) Housing loans sanctioned to individuals above 30 lakh but below Rs. 75 lakh secured by mortgage of

immoveable property which are classified as standard

assets with LTV ratio is = or < 75%

(b)(iii) Housing loans sanctioned to individuals upto Rs. 75

lakh secured by mortgage of immoveable property

which are classified as standard assets with LTV ratio

is > 75%

100

(b)(iv) Housing loans of Rs. 75 lakh and above, sanctioned to individuals irrespective of LTV ratio, secured by

mortgage of immoveable property, which are classified as standard assets

125

(b)(v) Loans given for the purpose of insurance of the

property /borrower in case of individual housing loans

Same as applicable

to the respective

housing loan.^][5]

^{2 [}Other housing loans

100

Note: Housing loans referred to in item b) and c) above are excluding any portion of such housing loans guaranteed by a mortgage guarantee company registered with the Reserve Bank of India in accordance with the Reserve Bank of India Guidelines for Mortgage Guarantee Companies.

Ca)

Any portion of housing loans referred to in item b) and c) of sub-explanation (3) guaranteed by mortgage guarantee company registered with the Reserve Bank of India, the risk weight assets for such guaranteed portion shall be calculated as % weight mentioned against the rating of the mortgage guarantee company as below:

Long term ratings of the mortgage guarantee company by the approved credit rating agencies referred to in paragraph 3 of the principal Directions

AAA

Below AA or unrated

As applicable to unguaranteed portion

Where ‘+’ or ‘-‘ notation is attached to the rating, the corresponding main rating category risk weight should be used.

When a guaranteed exposure is classified as non-performing in accordance with the applicable directions, the guarantee will cease to be a credit risk mitigant and no adjustment would be permissible under this provision.^]

i) Fund based and non-fund based exposures to commercial real estate (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.).

100

ii) Investments in Mortgage Backed Securities (MBS) and other ecognized exposures backed by exposures as at (i) above.

125

(4)

Current Assets:

Stock on hire (please see note 2 below)

100

Inter corporate loans/ deposits

100

Loans and advances fully secured by company’s own deposits

Loan to staff

Other secured loans and advance considered good

100

Bills purchased/ discounted

100

Others (to be specified)

100

(5)

Fixed Assets (net of depreciation):

Assets leased out (net book value)

100

Premises

100

Furniture & Fixtures

100

Other Fixed Assets(to be specified)

100

(6)

Other Assets:

Income tax deducted at source (net of provision)

Advance tax paid (net of provision)

Interest due on Government Securities and approved securities

Others(to be specified)

100

Notes:

(1) Netting may be done only in respect of assets where provisions for depreciation or for bad and doubtful debts have been made.

(2) Stock on hire should be shown net of finance charges i.e. interest and other charges recoverable.

(3) Assets which have been deducted from owned fund to arrive at tier-I capital pursuant to paragraph 2(1)(zf) will have a weightage of “0”.

(4) For being eligible for risk weight of 50%, investments in mortgage backed security, receipt or other security referred to in item (d) of sub-Explanation (2) should fulfill the following terms and conditions, namely :-

(a) The assignment of debt together with the securities therefor and the receivables thereunder by the originating housing finance company or scheduled commercial bank in favour of the trust or the securitisation company as defined in Clause (za) of sub-section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(54 of 2002) issuing such receipt or other security is complete and irrevocable.

(b) The trust or the securitisation company is holding the debt together with the securities therefor exclusively for the benefit of the investors in such receipt or other security.

(c) The originating housing finance company or scheduled commercial bank participating in the securitisation transaction, in which such mortgage backed security, receipt or other security has been issued, as a seller, manager, servicer or provider of credit enhancement or liquidity facilities;

(i) does not own any equity or preference share in the capital of the securitisation company or is the beneficiary of the trust;

(ii) has not named the trust or the securitisation company in such manner which implies any connection with it;

(iii) does not have any of its director, officer or employee on the Board of securitisation company unless the Board is made up of at least three members and there is a majority of independent directors and the official representing the originating institution in the Board of the securitisation company does not have veto powers;

(iv) does not directly or indirectly control the trust or the securitisation company; and

(v) has not agreed to support any losses arising out of the securitisation transaction or to be suffered by the investors involved in it or agreed to bear recurring expenses of the transaction.

(d) Each debt securitised is a loan advanced to an individual for the acquisition/ construction of residential immovable property which has been mortgaged in favour of the originating housing finance company or scheduled commercial bank on exclusive basis.

(e) Securitised debt had investment grade credit rating by any of the credit rating agencies at the time of assignment to the trust/ securitisation company.

(f) The investors are entitled to call upon the issuer – the trust/ securitisation company to take steps for recovery in the event of default and distribute the net proceeds to the investors as per the terms of issue of receipt or other security.

(g) The trust or the securitisation company undertaking the issue in which investment has been made is not engaged in any business other than the business of issue and administration of securitisation of housing loans.

(h) The trustees appointed to manage the issue is governed by the provisions of Indian Trusts Act, 1882 (2 of 1882).

Off-Balance Sheet item

(2) In these directions, degrees of credit risk exposure attached to off-balance sheet items have been expressed as a percentage of credit conversion factor. Hence the face value of each item requires to be first multiplied by the relevant conversion factor to arrive at risk adjusted value of off-balance sheet item. The aggregate shall be taken in to account for reckoning the minimum capital ratio. This shall have to be again multiplied by the risk weight of 100. The risk weighted value of the off-balance sheet items shall be calculated as per the credit conversion factors of non-funded items as detailed under:-

Nature of Items

credit conversion factor (%)

Undisbursed amounts of Housing loans sanctioned

ii)

Financial & Other guarantees

100

iii)

Shares/ debentures underwriting obligations

iv)

Partly-paid shares/ debentures

100

Bills discounted/ rediscounted

100

vi)

Lease contracts entered into but yet to be executed

100

vii)

Other contingent liabilities (to be specified)

Provided that in item (i) above, in those cases where no documents are executed, no disbursement has taken place and in case sanction lapses in course of time and notice to that effect is served on prospective borrower, credit conversion factor shall be taken as 0% and in the case of partly disbursed housing loans credit conversion factor shall be taken as 50%.

Note: Cash margins/ deposits shall be deducted before applying the conversion factor.

Restrictions on investment in real estate, exposure to and engagement of brokers

31. (1) INVESTMENT IN LAND OR BUILDINGS

No housing finance company, shall invest in land or buildings, except for its own use, an amount exceeding twenty per cent of its capital fund,

Provided that such investment over and above ten percent of its owned fund shall be made only in residential units.

Note:

‘Capital fund’ means the aggregate of ‘tier-I capital’ and ‘tier-II capital’.

Provided that the land or buildings acquired in satisfaction of its debts shall be disposed off by the housing finance company within a period of three years or within such a period as may be extended by the National Housing Bank, from the date of such acquisition if the investment in these assets together with such assets already held by the housing finance company exceeds the above ceiling.

(2) EXPOSURE TO CAPITAL MARKET:

(a) Limits on housing finance companies’ exposure to capital market

The aggregate exposure of a housing finance company to the capital market in all forms (both fund based and non-fund based) should not exceed 40 per cent of its net worth as on March 31 of the previous year. Within this overall ceiling, direct investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] of the housing finance company should not exceed 20 per cent of its networth.

Net worth for the purpose of this sub-paragraph would comprise of Paid-up capital plus Free Reserves including Share Premium but excluding Revaluation Reserves, plus Investment Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit and Loss account, Accumulated Losses and Intangible Assets. No general or specific provisions should be included in computation of net worth. Infusion of capital through equity shares, either through domestic issues or overseas floats after the published balance sheet date, may also be taken into account for determining the ceiling on exposure to capital market. Housing Finance Company shall furnish to the National Housing Bank, statutory auditor’s certificate on completion of the augmentation of capital before reckoning the same for above purpose.

(b) Components of Capital Market Exposure

Capital market exposure of housing finance company shall include both their direct exposures and indirect exposures. The aggregate exposure (both fund and non-fund based) of Housing Finance Company to capital markets in all forms shall include the following:

i) direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt;

ii) advances against shares/bonds/debentures or other securities or on clean basis to individuals for investment in shares (including Initial Public Offers/Employees Stock Options), convertible bonds, convertible debentures, and units of equity-oriented mutual funds;

iii) advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity oriented mutual funds are taken as primary security;

iv) advances for any other purposes to the extent secured by the collateral security of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds, i.e. where the primary security other than shares/convertible bonds/convertible debentures/units of equity oriented mutual funds does not fully cover the advances;

v) secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers;

vi) loans sanctioned to corporates against the security of shares / bonds/ debentures or other securities or on clean basis for meeting promoter’s contribution to the equity of new companies in anticipation of raising resources;

vii) bridge loans to companies against expected equity flows/issues;

viii) underwriting commitments taken up by the housing finance companies in respect of primary issue of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds;

ix) financing to stockbrokers for margin trading; and

x) all exposures to Venture Capital Funds (both registered and unregistered). These will be deemed to be on par with equity and hence will be reckoned for compliance with the capital market exposure ceilings (both direct and indirect).

(c) Items excluded from Capital Market Exposure

The following items shall be excluded from the aggregate exposure ceiling of 40 per cent of networth and direct investment exposure ceiling of 20 per cent of networth (wherever applicable):

i) Investment of a housing finance company in own subsidiaries, joint ventures, and investments in unlisted shares and convertible debentures, convertible bonds issued by institutions forming crucial financial infrastructure and other All India Financial Institutions as detailed below. After listing, the exposures in excess of the original investment (i.e. prior to listing) shall form part of the Capital Market Exposure.

National Securities Depository Ltd. (NSDL)
Central Depository Services (India) Ltd. (CDSL)
National Securities Clearing Corporation Ltd. (NSCCL)
National Stock Exchange (NSE)
Clearing Corporation of India Ltd., (CCIL)
Credit Information Bureau of India Ltd. (CIBIL)
Multi Commodity Exchange Ltd. (MCX)
National Commodity and Derivatives Exchange Ltd. (NCDEX)
National Multi-Commodity Exchange of India Ltd. (NMCEIL)
National Collateral Management Services Ltd. (NCMSL)

All India Financial Institutions

Industrial Finance Corporation of India, Ltd. (IFCI)
Tourism Finance Corporation of India Ltd. (TFCI)
Risk Capital & Technology Finance Corporation Ltd. (RCTC)
Technology Development & Information Co. of India Ltd. (TDICI)
National Housing Bank (NHB)
Small Industries Bank of India (SIDBI)
National Bank for Agriculture & Rural Development (NABARD)
Export Import Bank of India (EXIM Bank)
Industrial Investment Bank of India (IIBI)
Life Insurance Corporation of India (LIC)
General Insurance Corporation of India (GIC)

ii) Tier I and Tier II debt instruments issued by other housing finance companies;

iii) Investment in Certificates of Deposit (CDs) of other housing finance companies;

iv) Preference Shares;

v) Non-convertible debentures and non-convertible bonds;

vi) Units of Mutual Funds under schemes where the corpus is invested exclusively in debt instruments;

vii) Shares acquired by housing finance companies as a result of conversion of debt/overdue interest into equity under a Corporate Debt Restructuring (CDR) mechanism.

(d) Computation of exposure

For computing the exposure to the capital markets, loans/advances sanctioned and guarantees issued for capital market operations would be reckoned with reference to sanctioned limits or outstanding, whichever is higher. Further, direct investment of a housing finance company in shares, convertible bonds, convertible debentures and units of equity oriented mutual funds shall be calculated at their cost price.

(3) ENGAGEMENT OF BROKERS

For engagement of brokers to deal in investment transactions, the housing finance companies should observe the following:

(a) Transactions should not be put through the brokers’ accounts. The brokerage on the deal payable to the broker, if any (if the deal was put through with the help of a broker), should be clearly indicated on the notes/memorandum put up to the top management seeking approval for putting through the transaction and separate account of brokerage paid, broker-wise, should be maintained.

(b) If a deal is put through with the help of a broker, the role of the broker should be restricted to that of bringing the two parties to the deal together.

(c)While negotiating the deal, the broker is not obliged to disclose the identity of the counterparty to the deal. On conclusion of the deal, he should disclose the counterparty and his contract note should clearly indicate the name of the counterparty.

(d) On the basis of the contract note disclosing the name of the counterparty, settlement of deals, viz. both fund settlement and delivery of security should be directly between the parties and the broker should have no role to play in the process.

(e) With the approval of their top managements, housing finance companies should prepare a panel of approved authorized brokers which should be reviewed annually or more often if so warranted. Clear-cut criteria should be laid down for empanelment of brokers, including verification of their creditworthiness, market reputation, etc. A record of broker-wise details of deals put through and brokerage paid, should be maintained.

(f) A disproportionate part of the business should not be transacted through only one or a few brokers. Housing finance companies should fix aggregate contract limits for each of the approved brokers. A limit of 5% of total transactions (both purchase and sales) entered into by a housing finance company during a year should be treated as the aggregate upper contract limit for each of the approved brokers. This limit should cover both, the business initiated by a housing finance company and the business offered / brought to the housing finance company by a broker. Housing finance companies should ensure that the transactions entered into through individual brokers during a year normally do not exceed this limit. However, if for any reason it becomes necessary to exceed the aggregate limit for any broker, the specific reasons therefore should be recorded, in writing, by the authority empowered to put through the deals. Further, the board should be informed of this, post facto. However, the norm of 5% would not be applicable (i) to a housing finance company whose total transactions in a year do not exceed Rs 20 crores; and (ii) to housing finance companies’ dealings through Primary Dealers.

(g) The auditors who audit the treasury operations should scrutinise the business done through brokers also and include it in their monthly report to the Chief Executive Officer of the housing finance company. Besides, the business put through any individual broker or brokers in excess of the limit, with the reasons therefor, should be covered in the half-yearly review to the Board of Directors.

(h) Housing finance companies may undertake securities transactions through stock brokers only on National Stock Exchange/Bombay Stock Exchange/ Over the Counter Exchange of India.

Concentration of credit/ investment

32. (1) No housing finance company shall,-

(i) lend to-

(a) any single borrower exceeding fifteen percent of its owned fund; and

(b) any single group of borrowers exceeding twenty-five percent of its owned fund;

(ii) invest in-

(a) the shares of another company exceeding fifteen percent of its owned fund;

(b) the shares of a single group of companies exceeding twenty-five percent of its owned funds;

(iii) lend and invest(loans/investments together) exceeding –

(a) twenty-five percent of its owned fund to a single party; and

(b) forty percent of its owned fund to a single group of parties.

Provided that within the overall ceiling prescribed under Sub- paragraph (1), investment of a housing finance company in the shares of another housing finance company shall not exceed ten per cent of the equity capital of the investee company.

(2) Where at the commencement of these provisions;

(i) the lending of a housing finance company is in excess of the ceiling prescribed under sub-paragraph (1), such excess portion shall be brought down by the housing finance company as per the repayment schedule in due course; and

(ii) the investment of a housing finance company is in excess of the ceiling prescribed under sub-paragraph (1), such excess portion shall be disposed of within a period not exceeding three years or within such period as may be extended by the National Housing Bank.

Notes:

(1) For determining the above mentioned limits, off-balance sheet exposures be converted in to credit risk by applying the conversion factors explained here in above.

(2) The investment in debentures for the above purpose be treated as credit and not investment.

(3) The above ceilings on credit/investments shall be applicable to the own group of the housing finance company as well as to the other group of borrowers/ investee companies.

(4) “Shares” shall mean and include investment in various instruments such as Equity Shares, Preference Shares eligible for capital status, Subordinated Debt Instruments, Hybrid Debt Capital Instruments and any other instruments approved as in the nature of capital.

(5) Investment of a housing finance company in the shares of its subsidiaries, companies in the same group and other housing finance companies, to the extent of ten per cent of its owned fund, shall carry a risk weight of 100% as prescribed at item (2) (e) of ‘Weighted Risk Assets- on balance sheet items under ‘Explanation’ to Paragraph 30 of these directions. Such investment in excess of ten per cent of its owned fund shall continue to be deducted from the net owned fund of the housing finance company as prescribed at item.(I) of ‘Explanation’ to Section 29A of the National Housing Bank Act, 1987.

^[Housing Finance Companies not to be partners in partnership firms.

32A. (1) No housing finance company shall contribute to the capital of a partnership firm or become a partner of such firm.

(2) A housing finance company, which had already contributed to the capital of a partnership firm or was a partner of a partnership firm, shall seek early retirement from the partnership firm.^][6]

[1] Inserted by NHB.HFC.DIR.2/CMD/2010 dated 24^th December, 2010, published in the Gazette of India, Part III Section 4 dated 15^th January, 2011.

[2] Substituted by NHB.HFC.DIR.3/CMD/2011 dated August 5, 2011 published in the Gazette of India, Part III Section 4 dated August 27, 2011. Prior to its substitution, sub-paragraph 1 read as under;

“Loans, Advances and Other Credit Facilities Including Bills Purchased and Discounted

(1) The provisioning requirement in respect of loans, advances and other credit facilities including bills purchased and discounted shall be as under:

(i) Loss Assets	The entire assets shall be written off. If the assets are permitted to remain in the books for any reason, 100% of the outstandings shall be provided for.
(ii) Doubtful Assets	(a) 100% provision to the extent to which the advance is not covered by the realisable value of the security to which the housing finance company has a valid recourse shall be made. The realisable value is to be estimated on a realistic basis;
	(b) in addition to item (a) above, depending upon the period for which the asset has remained doubtful, provision to the extent of 20% to 50% of the secured portion (i.e. estimated realisable value of the outstandings) shall be made on the following basis:-
Period for which the asset has been considered as doubtful Up to one year One to three years More than three years			% of provision 20 30 50



(iii) Sub-standard Assets		A general provision of 10% of total outstanding shall be made
(iv) Standard Assets in respect of non-housing loans		A general provision of 0.4% of the total outstanding amount of non-housing loans which are standard assets shall be made.”

[3] Substituted by NHB.HFC.DIR. 4 / CMD/2012 dated January 19 , 2012 published in the Gazette of India, Part III Section 4 dated February 18 , 2012. Prior to its substitution, clause (iv), for sub-clause (b) as inserted by NHB.HFC.DIR. 3/CMD/2011 read as under;

“(iv) Standard Assets in respect of non-housing loans

A general provision of 0.4% of the total outstanding amount of non-housing loans which are standard assets shall be made.”

[4] Inserted by NHB.HFC.DIR.3/CMD/2011 dated August 5, 2011 published in the Gazette of India, Part III Section 4 dated August 27, 2011.

[5] Substituted by NHB.HFC.DIR.2/CMD/2010 dated December 24, 2010, published in the Gazette of India, Part III Section 4 dated January 15, 2011. Prior to its substitution, item code and risk weight given in the On Balance Sheet assets at item (3) (b)(ii) & (iii) read as under:

“ b)
	(b)(ii) Housing loans sanctioned to individuals upto 30 lakhs secured by mortgage immoveable property, which are classified as standard assets with LTV ratio is = or < 75%	75
	(b)(iii) Housing loans sanctioned to individuals, irrespective of the amount, secured by mortgage of immoveable property, which are classified as standard assets, where LTV ratio is > 75%”	100

2 Inserted by NHB.HFC.DIR.5/CMD/2012 dated 28^th May, 2012 published in the Gazette of India, Part III- Sec.4 dated July 7, 2012.

[6] Inserted by NHB.HFC.DIR.3/CMD/2011 dated August 5, 2011 published in the Gazette of India, Part III Section 4 dated August 27, 2011

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PRUDENTIAL NORMS - Housing Finance Regulatory