The Reserve Bank of India (RBI) has been working to align the regulatory framework for housing finance companies (HFCs) with that of non-banking financial companies (NBFCs) for some time now. This is part of the RBI’s broader effort to streamline the financial sector and create a more level playing field for all financial institutions.
Reasons for Aligning the Regulatory Framework
There are a number of reasons why the RBI is aligning the regulatory framework for HFCs with that of NBFCs. These include:
- To promote competition: Aligning the regulatory framework will create a more level playing field for HFCs and NBFCs. This will promote competition and innovation in the housing finance sector.
- To reduce regulatory arbitrage: HFCs currently enjoy some regulatory advantages over NBFCs. Aligning the regulatory framework will reduce regulatory arbitrage and make the housing finance sector more efficient.
- To ensure financial stability: HFCs are playing an increasingly important role in the Indian financial system. Aligning the regulatory framework will help to ensure that HFCs are well-regulated and that the housing finance sector is financially stable.
Key Changes under the Alignment
The RBI has already made a number of changes to the regulatory framework for HFCs to bring it in line with that of NBFCs. These changes include:
- Capital adequacy requirements: HFCs are now required to maintain a minimum capital adequacy ratio (CAR) of 15%, which is the same as the requirement for NBFCs.
- Asset classification and provisioning requirements: HFCs are now required to follow the same asset classification and provisioning requirements as NBFCs.
- Liquidity requirements: HFCs are now required to maintain the same liquidity requirements as NBFCs.
- Corporate governance norms: HFCs are now required to comply with the same corporate governance norms as NBFCs.
Remaining Changes
There are still a few remaining changes that the RBI needs to make to fully align the regulatory framework for HFCs with that of NBFCs. These changes include:
- Allowing HFCs to raise funds from the public: HFCs are currently not allowed to raise funds from the public. Aligning the regulatory framework would allow HFCs to raise funds from the public, which would give them access to a wider range of funding sources.
- Subjecting HFCs to the same resolution framework as NBFCs: HFCs are currently not subject to the same resolution framework as NBFCs. Aligning the regulatory framework would subject HFCs to the same resolution framework, which would help to protect consumers and investors in the event of an HFC failure.
Conclusion
Aligning the regulatory framework for HFCs with that of NBFCs is a positive development. It will promote competition, reduce regulatory arbitrage, and ensure financial stability in the housing finance sector. The RBI has already made a number of changes to the regulatory framework, but there are still a few remaining changes that need to be made.
MCQs
- Which of the following is not a reason for aligning the regulatory framework for HFCs with that of NBFCs?
- (a) To promote competition
- (b) To reduce regulatory arbitrage
- (c) To protect consumers and investors
- (d) To reduce the cost of borrowing for HFCs
- Which of the following is a key change under the alignment of the regulatory framework for HFCs with that of NBFCs?
- (a) HFCs are now required to maintain a minimum CAR of 15%.
- (b) HFCs are now required to follow the same asset classification and provisioning requirements as NBFCs.
- (c) HFCs are now required to maintain the same liquidity requirements as NBFCs.
- (d) All of the above
- Which of the following is a remaining change that the RBI needs to make to fully align the regulatory framework for HFCs with that of NBFCs?
- (a) Allowing HFCs to raise funds from the public
- (b) Subjecting HFCs to the same resolution framework as NBFCs
- (c) Both (a) and (b)
- (d) None of the above
Answers
- (d) To reduce the cost of borrowing for HFCs
- (d) All of the above
- (c) Both (a) and (b)