The regulatory powers of the Reserve Bank of India have been significantly enhanced, with Budget 2019-20 bringing housing finance companies (HFCs) under its ambit and deepening its governance of non-banking finance companies (NBFCs).

A reading of the Finance Bill, 2019, shows significant provisions empowering the RBI. The central bank can now remove the director of an NBFC and even supersede its board “in the public interest or to prevent the affairs of NBFC being conducted in a manner detrimental to the interest of the depositors or creditors”. It can further appoint a new administrator for the board.

Merger and revamp

Another proposed amendment to the RBI Act will allow it to frame schemes for amalgamating, splitting and reconstructing an NBFC if it feels it is required after looking into the NBFC’s books of accounts.

NBFC crisis

The move comes at a time when HFCs and NBFCs such as Dewan Housing Finance Company (DHFL) are facing a liquidity crisis and a slew of downgrades following the default by IL&FS last September.

Noting that an efficient and conducive regulation of the housing sector is extremely important in the current context, Finance Minister Nirmala Sitharaman, in her Budget speech, pointed out that at present the National Housing Bank (NHB) is both the refinancer and regulator for HFCs.

“This gives a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulation authority over the housing finance sector from NHB to RBI,” she said.

Just last month, RBI Governor Governor Shaktikanta Das had commented that while the RBI does not regulate HFCs, it has been keeping a close eye on them due to the high level of exposure of banks to the sector.

Experts said the move is also necessitated by the transfer of ownership of the NHB to the government from the RBI earlier this year.

Focussed role

RV Verma, former NHB Chairman, said care must be taken to ensure that HFCs are not clubbed with NBFCs now. “Besides the turmoil in DHFL and some other firms recently, HFCs have proved to be a very stable source of funds. I am sure the RBI will ensure that the focussed role of these firms is expanded on,” he said, adding that the current refinancing and regulation functions of the NHB are indeed complementary.

“Shifting the regulation of HFCs to the RBI is an important step to give confidence to domestic and foreign investors,” said Deo Shankar Tripathi, MD and CEO of Aadhar Housing Finance.

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