Guidelines for safe investments in HFCs

1. An HFC whose application for certificate of registration has been rejected or whose certificate of registration has been cancelled by the National Housing Bank (NHB) or who is having a certificate of registration - not valid for acceptance of public deposits is not entitled to accept fresh public deposits or renew existing public deposits.

2. Registration of an HFC with NHB merely authorizes it to conduct the business of a housing finance institution. It is not a guarantee for repayment of deposits by the HFC. HFCs cannot use the name of NHB in any manner.

3. The HFCs cannot -

offer more than 12.5% per annum interest on public deposits

offer any gifts/incentives

accept public deposits for less than 12 months or for more than 84 months

4. The HFCs must issue proper receipt for deposits.

5. The HFC should be complying with all the prudential norms stipulated by NHB and should have a minimum credit rating at 'A'.

If an HFC does not have the above credit rating, it should have a capital adequacy ratio of not less than 15%, in which case it can have public deposits only upto 2 times of its net owned fund or Rs. 10 crore, whichever is lower.

6. The depositor should read carefully the financial and other statements made by the company in the application form soliciting public deposits. The depositor should verify from the application form that the HFC is eligible to accept public deposits.

Deposits of HFCs are neither insured nor guaranteed.


The performance of various primary-implementing agencies under the Golden Jubilee Rural Housing Finance Scheme (GJRHFS) during the half year April-September 2002 is given below:

(no. of dwelling units)



April-September, 2002






% Achieved





















A meeting was convened by NHB to review the half-yearly performance of public sector banks on December 9, 2002 at New Delhi which was followed by another meeting with the CEOs of approved HFCs. In the meeting with the bankers, Shri V. Sridar, Chairman & managing Director of NHB commended the bankers for their keen interest in housing finance. At the same time, he advised them to be more vigilant as the banks were still at the initial stage of the learning curve in housing finance. He desired that sound appraisal norms be evolved by the Banks.

Representatives of most of the Banks assured that the targets allocated to them under GJRHFS would be achieved due to the increased thrust by banks towards the lending activity during the third and fourth quarter.

During the course of the discussion some bankers raised certain issues of concern such as, i) Non availability of clear title deeds ( e.g. in Lal Dora areas); ii) High stamp duty and registration charges and iii) Mortgage of agricultural land not permitted for other than agricultural purposes. Addressing these issues, Shri R.V. Verma, Executive Director, NHB said that the issues were already engaging the attention of NHB. He also stated that in few States, some of the above issues had been sorted out and the efforts would be continued in respect of other states.

In the meeting with the CEOs of approved HFCs it was opined by CMD of NHB that the positioning of HFCs in the present day market was an area of concern. He observed that the banks have entered into the housing finance market in a big way in the last couple of years and by the present available trends, it would be quite possible that by the end of year 2002-03 the banks might replace HFCs as major players in the housing finance market. He observed that the banks had been able to corner the major share of this market because of their abilities to raise funds at a comparatively lower rate and with the help of well organised branch network at the grass root level. He was, however, of the opinion that keeping in view the ALM constraints, after 2-3 years it would be possible for the banks to dominate the housing finance market only if a sound securitisation market was in place by that time.

During the course of the meeting, HFC-wise performance and targets under GJRHFS were reviewed. Representatives of the HFCs assured that the targets allocated to them would be achieved.

Certain other issues, such as Timely submission of Returns, Reduction in Rate of Interest on NHB refinance and prepayment policy, Appointment of recovery officers under Foreclosure provisions of the NHB(Amendment) Act, 2000, Debenture Redemption Reserve, Risk Weights on Housing Loans , Ceiling on Borrowing Limits, ALM Guidelines for HFCs, Taking over of Housing Loans and Impact of Kelkar Committee Recommendations were also discussed in depth in the meeting.

Refinance Scheme as applicable to
Scheduled Banks and Housing Finance Companies, 2003

The provision of providing adequate housing has been a major concern all over the world. Continuos efforts have been made to meet the ever increasing demand of each generation. In developing countries, housing and community development still present the most serious problem and require an urgent action because only through housing can a nation acquire higher productivity and an improved quality of life. Further, the housing sector in any country has also been looked upon as an engine of growth in terms of its forward and backward linkages with the rest of the economy.

The housing sector continued to record spectacular growth which is evident from the fact that during 2001-02 as the housing finance companies 'approved' by NHB for refinance assistance disbursed close to Rs. 15,000 crores. Also, in recent years, commercial banks have been playing an important role in providing credit to the housing sector by crossing the Rs. 10,000 crore mark.

It is felt that NHB should play a lead role in the substantial growth being achieved by the Banks and HFCs, without compromising on the health of the housing finance sector. Being the Apex level financial institution for the housing sector in the country, NHB's endeavour has been to support this process through carefully designed, albeit flexible, schemes announced from time to time. The developments in the financial sector, have brought in their wake, a host of market driven parameters. To be responsive to the changes, NHB has also modified its approach, strategy and programme from time to time.

The competition in the housing finance sector has produced certain features with reference to the takeover of loans and the resultant re-pricing which was not envisaged earlier. Many Banks and HFCs require their problems to be addressed in the form of shorter term loans, a choice of fixed and floating interest rate and finance being available against prospective loans based on their growth projections. In view of this "felt need", NHB has decided to adopt an integrated product which has an inherent risk perception mechanism and on which rests many other issues like exposure norm, security and interest rate.

It is keeping with the above in mind NHB has now introduced a Liberalised Refinance Scheme (LRS) applicable to Scheduled Banks and Housing Finance Companies, 2003. The objective of the liberalised refinance scheme is to encourage addition of new housing stock and maintenance of the existing housing stock of the country and provide necessary refinance support therefor to the retail lending institutions.

Under the LRS, refinance will be available to Banks and HFCs in respect of their direct lending to individuals for loan size upto Rs.1 crore. Refinance will be available in respect of their prospective as well as loans already been disbursed conforming to refinance norms. Term loans of Scheduled Commercial Banks which have already been disbursed to HFCs will also be covered under refinance from NHB. NHB has reduced its fixed rate interest by about 200 bps across the slabs and introduced the concept of re-fixing of interest rate on completion of every 3 years in respect of its outstanding loans with the flexible option leaving with HFC. NHB has also introduced floating rates of interest besides its fixed rates depending on varying maturities which will help the Banks and HFCs to select the product line as per their requirement.

The rates of interest for 6-Star HFCs and Scheduled Commercial Banks (in respect of direct loans) with immediate effect are given below:

I. Fixed Rate

Loan Size

>=2 to <= 5 years

> 5 and <= 7 years

> 7 and <= 15 years

A - Upto and Rs. 10,00,000




B - Rs. 10,00,001




II. Floating Rate

Loan Size

2-15 years

A - Upto and Rs. 10,00,000


B - Rs. 10,00,001 and upto Rs. 1 crore


For 5-Star HFCs: Rates for 6 Star HFCs plus 40bp

For 4-Star HFCs:
Rates for 6 Star HFCs plus 65bp

For 3-Star HFCs:
Rates for 6 Star HFCs plus 75bp

For 2-Star HFCs:
Rates for 6 Star HFCs plus 85bp

HFCs and Banks are free to decide their onward lending rate to the borrowers.

The salient features of LRS are as given below:

v Provides refinance assistance in respect of housing loans to be disbursed by the HFCs in addition to loans already disbursed. Refinance assistance to Scheduled Banks will cover their lending to individual for housing. Besides, Scheduled Commercial Bank's term loan to HFCs for their lending to individual for housing will also be covered under refinance.

v Covers individual housing loans upto Rs. 1 crores besides indirect lending (term loans) provided by the Banks to HFCs

v NHB has introduced Internal Credit Rating for HFCs to determine HFC's eligibility, exposure and interest rate and security for refinance assistance.

v Banks and HFCs may choose the need based repayment period (from 2 to 15 years) in order to manage their ALM besides getting the benefit of reduced interest rate.

v Banks and HFCs will have the option to switch over from fixed to floating rate of interest rate and vice-versa on payment of nominal fee.

v Prepayment levy has been reduced substantially.

v Procedure for availing refinance has been simplified.

Further, NHB's initiatives on securitisation of HFCs loan assets coupled with the foreclosure procedures for facilitating recovery is expected to add further impetus to the growth of the housing finance industry. The substantial reduction in interest rates on refinance of NHB as well as liberalised norms for availing refinance will result in accelerated growth and expansion in housing credit with the attendant benefits to the home loan seekers by way of better terms on their loans.

Copyright © 2012 National Housing Bank