Whereas, having considered it necessary in the public interest, the National Housing Bank had issued Housing Finance Companies (NHB) Directions, 1989, to every housing finance company in exercise of the powers conferred on it under the National Housing Bank Act 1987 (53 of 1987).

2. And whereas the National Housing Bank had also issued guidelines to housing finance companies on prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful assets, capital adequacy and concentration of credit/investments.

3. And whereas the National Housing Bank Act, 1987 has been amended further by the National Housing Bank (Amendment) Act, 2000 (15 of 2000) further to enable the National Housing Bank to safeguard the interest of depositors and promote healthy and universal growth of Housing Finance Companies in the country.

4. And whereas, having regard to the objectives aforesaid, it is considered desirable to issue consolidated directions in respect of matters relating to acceptance of deposits by housing finance companies, prudential norms for income recognition, accounting standards, asset classification, provision for bad and doubtful assets, capital adequacy and concentration of credit/investments to be observed by the housing finance companies and matters to be included in the Auditors Report by the auditors of such housing finance companies and matters ancillary and incidental thereto.

5. Now therefore, the National Housing Bank having considered it necessary in the public interest and being satisfied that for the purpose of enabling the National Housing Bank to regulate the housing finance system of the country to its advantage, it is necessary to give the Directions mentioned below, hereby in exercise of the powers conferred, by sections 30, 30A, 31 and 33 of the National Housing Bank Act, 1987 ( 53 of 1987) and of all the powers enabling it in this behalf, and in supersession of the aforementioned directions and guidelines, gives the Directions hereinafter specified.

CHAPTER I - PRELIMINARY

Short title, commencement and applicability of the Directions

1. (1) These Directions shall be known as the Housing Finance Companies (NHB) Directions, 2001. They shall come into force from the date of publication in the Official Gazette* and any reference in these Directions to the date of commencement thereof shall be deemed to be a reference to that date.

(2) Directions contained in Chapter IV shall be applicable to every auditor of a housing finance company.

* Notified under Part III-Section-4 of the gazette of India , dt. December 29,2001

Definitions

2. (1) In these Directions, unless the context otherwise requires,

(a) “banking company” means a banking company as defined in Section 5(c) of the Banking Regulation Act, 1949 (10 of 1949);

•  “break up value” means the equity capital and reserves as reduced by intangible assets and revaluation reserves, divided by the number of equity shares of the investee company;

•  ”carrying cost” means book value of the assets and interest accrued thereon but not received;

•  “company” means a company as defined in Section 45I(aa) of the Reserve Bank of India Act, 1934 (2 of 1934) but does not include a company which is being wound up under any law for the time being in force;

(e) “current investment” means an investment which is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made;

(f) “deposit” shall have the same meaning as assigned to it in Section 45 I (bb) of the Reserve Bank of India Act, 1934 (2 of 1934);

•  “depositor” means any person who has made a deposit with the housing finance company or a heir, legal representative, administrator or assignee of the depositor;

•  “doubtful asset” means a term loan, or a leased asset, or a hire purchase asset, or any other asset, which remains a sub-standard asset for a period exceeding two years

[Provided that with effect from March 31, 2005, “doubtful asset” shall mean a term loan, or a leased asset, or a hire purchase asset, or any other asset, which remains a sub-standard asset for a period exceeding twelve months]¹

(i) “earning value” means the value of an equity share computed by the average of profits after tax as reduced by the preference dividend and adjusted for extra ordinary and non recurring items, for the immediately preceding three years and further divided by the number of equity shares of the investee company and capitalised at the following rate:-

(i) in case of predominantly manufacturing company, eight percent;

(ii) in case of predominantly trading company, ten percent; and

(iii) in case of any other company, including a housing finance company, twelve percent;

Note:

If an investee company is a loss making company, the earning value will be taken as zero.

(j) “ fair value” means the mean of the earning value and the break up value;

(k) “free reserves” shall include the balance in the share premium account, capital and debenture redemption reserves and any other reserve shown or published in the balance sheet of the company and created through an allocation of profits, not being (1) a reserve created for repayment of any future liability or for depreciation in assets or for bad debt or (2) a reserve created by revaluation of the assets of the company;

¹ Inserted by paragraph 1 of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27 th December,2002

(l) “housing finance company” means a company incorporated under the Companies Act, 1956 (1 of 1956) which primarily transacts or has as one of its principal objects, the transacting of the business of providing finance for housing, whether directly or indirectly;

•  “hybrid debt” means capital instrument which possesses certain characteristics of equity as well as of debt;

(n) “lending public financial institution ” means -

(i) a public financial institution specified in or under section 4A of the Companies Act, 1956 (1 of 1956); or

(ii) a State Financial Corporation or a State Industrial Investment Corporation; or

(iii) a scheduled commercial bank; or

(iv) the General Insurance Corporation of India established in pursuance of the provisions of section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972); or

(v) any other Institution which the National Housing Bank may, by notification, specify in this behalf;

•  “long term investment” means an investment other than a current investment;

(p) “loss asset” means -

(i) an asset which has been identified as loss asset by the housing finance company or its internal or external auditor or by the National Housing Bank, to the extent it is not written off by the housing finance company; and

[(ii) an asset which is adversely affected by a potential threat of non recoverability due to any one of the following, namely:

(a)  non-availability of security, either primary or collateral, in case of secured loans and advances;

(b)  erosion in value of security, either primary or collateral, is established;

(c)  insurance claim, if any, has been denied or settled in part;

(d)  fraudulent act or omission on the part of the borrower;

(e)  the debt becoming time barred under Limitation Act, 1963 (36 of 1963);

(f)  inchoate or defective documentation.  

Explanation - For the removal of doubt, it is clarified that mere right of the housing finance company to file suit against the borrower/guarantor for recovery of dues does not debar the National Housing Bank or the auditors to consider the asset or part thereof as loss asset due to aforesaid reasons. ]¹

(q) “net asset value” means the latest declared net asset value by the concerned mutual fund in respect of that particular scheme;

(r)“net book value” means -

(i) in the case of hire purchase asset, the aggregate of over due and future instalments receivable as reduced by the balance of the unmatured finance charges and further reduced by the provisions made as per paragraph 24(2)(i) of these Directions;

(ii) in the case of leased assets, aggregate of capital portion of over due lease rentals accounted as receivable and depreciated book value of the lease asset as adjusted by the balance of lease adjustment account;

¹ Substituted by paragraph 2 of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27 th December,2002

(s) “net owned fund” means net owned fund as defined under section 29A of the National Housing Bank Act, 1987 including paid up preference shares which are compulsorily convertible into equity capital;

(t) “non-performing asset” (referred to in these directions as “NPA”) means:-

(i) a loan asset, in respect of which, interest has remained past due for six months;

[(ii) a term loan(other than the one granted to an agriculturist or to a person whose income is dependent on the harvest of crops) inclusive of unpaid interest, when the installment is over due for more than six months or on which interest amount remained past due for six months;]²

(iii) a bill of exchange which remains over due for six months;

(iv) the interest in respect of a debt or the income on a receivable under the head ‘other current assets' in the nature of short term loans/advances, which facility remained over due for a period of six months;

(v) any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained over due for a period of six months;

(vi) the lease rental and hire purchase instalment, which has become over due for a period of more than twelve months;

(vii) an inter corporate deposit, in respect of which interest or principal has remained over due for a period of six months;

[Provided that with effect from March 31, 2005 , “non-performing asset” shall mean:-

(i)      an asset, in respect of which, interest has remained overdue for a period of ninety days or more;] 1

[(ii)    a term loan(other than the one granted to an agriculturist or to a person whose income is dependent on the harvest of crops) inclusive of unpaid interest, when the instalment is overdue for a period of ninety days or more or on which interest amount remained overdue for a period of ninety days or more;]³

1 [(iii)    a demand or call loan, which remained overdue for a period of ninety days or more from the date of demand or call or on which interest amount remained overdue for a period of ninety days or more;

(iv)    a bill which remains overdue for a period of ninety days or more;

(v)    the interest in respect of a debt or the income on receivables under the head ‘other current assets' in the nature of short term loans/advances, which facility remained overdue for a period of ninety days or more;

(vi)    any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of ninety days or more;

(vii)    the lease rental and hire purchase instalment, which has become overdue for a period of ninety days or more;

(viii)  an inter corporate deposit, in respect of which interest or principal has remained overdue for a period of ninety days or more.”]¹

[(ix) a term loan granted to an agriculturist or to a person whose income is dependent on the harvest of crops if the installment of principal or interest thereon remains unpaid:

(a) for two crop seasons beyond the due date if the income of the borrower is dependent on short duration crops, or

(b) for one crop season beyond the due date if the income of the borrower is dependent on long duration crop.

Explanation

(1) For the purpose of this sub-clause “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops, would be treated as “short duration” crops.

(2) The crop season for each crop means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each state.]?

¹ Inserted by paragraph 3 of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27 th December, 2002

2 & 3 Substituted by Notification No.NHB.HFC.DIR.10/CMD/2005 dated 11 th March, 2005

4 Inserted by Notification No. NHB.HFC.DIR.10/CMD/2005 dated 11 th March, 2005

(u) “owned fund” means paid up capital including preference shares compulsorily convertible into equity shares, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any;

(v) “past due” means an amount of income or interest which remains unpaid for a period of thirty days beyond the due date;

(w) “public deposit” means a deposit but does not include the following, namely:-

(i) any amount received from the Central Government or a State Government or any amount received from any other source and whose repayment is guaranteed by the Central Government or a State Government or any amount received from a local authority or any public housing agency, or a foreign Government or any other foreign citizen, authority or person;

(ii) any amount received from the National Housing Bank, established under the National Housing Bank Act, 1987 (53 of 1987), or the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964) or the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Corporation of India and its subsidiaries established in pursuance of the provisions of section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) or the Small Industries Development Bank of India established under the Small Industries Development Bank of India Act, 1989 (39 of 1989) or the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or National Bank for Agriculture and Rural Development established under the National Bank for Agriculture and Rural Development Act, 1982 or an Electricity Board constituted under the Electricity (Supply) Act, 1948 or the Tamil Nadu Industrial Investment Corporation Ltd., or the National Industrial Development Corporation of India Ltd., or the Industrial Credit & Investment Corporation of India Ltd., or the Industrial Finance Corporation of India Ltd., or the Industrial Investment Bank of India Ltd., or State Trading Corporation of India Ltd., or the Rural Electrification Corporation Ltd., or the Minerals and Metals Trading Corporation of India Ltd., or the Agricultural Finance Corporation Ltd., or the State Industrial and Investment Corporation of Maharashtra Ltd., or the Gujarat Industrial Investment Corporation Ltd.,or Asian Development Bank or International Finance Corporation or the Overseas Economic Cooperation Fund (OECF) or Kreditanstalt für Wiederaufbau (KfW) or any other institution that may be specified by the National Housing Bank in this behalf;

(iii) any amount received by a housing finance company from another company;

(iv) any amount received by way of subscription to any share, stock, bonds or debentures pending the allotment of the said shares, stock, bonds or debentures and any amount received by way of calls in advance on shares, in accordance with the Articles of Association of the housing finance company so long as such amount is not repayable to the members under the Articles of Association of the housing finance company;

(v) any amount received from a person who at the time of receipt of the amount was a Director of the housing finance company or any amount received from its shareholders by a private housing finance company or by a private housing finance company which has become a public housing finance company under section 43A of the Companies Act, 1956 and continues to include in its Articles of Association provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 of the Companies Act, 1956 (1 of 1956):

Provided that the Director or shareholder, as the case may be, from whom the money is received furnishes to the housing finance company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others;

Provided further that in the case of joint shareholders of a private limited company, money received from or in the name of the joint shareholders except the first named shareholder shall not be eligible to be treated as the receipt of money from the shareholder of the company;

(vi) any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the housing finance company; or by any other asset or with an option to convert them into shares in the housing finance company provided that in the case of such bonds or debentures secured by mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;

(vii) any amount brought in by the promoters by way of unsecured loan in pursuance of stipulations of lending institutions subject to the fulfillment of the following conditions, namely :-

(a) the loan is brought in pursuance of the stipulation imposed by the lending public financial institution in fulfillment of the obligation of the promoters to contribute such finance,

(b) the loan is provided by the promoters themselves and/or by their relatives, and not from their friends and business associates, and

•  the exemption under this sub-clause shall be available only till the loan of the lending public financial institution is repaid and not thereafter;

(viii) any amount received from a mutual fund which is governed by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996;

(ix) any amount received as hybrid debt or subordinated debt the minimum maturity period of which is not less than sixty months;

(x) any amount received from a relative of a director of a housing finance company;

Note : The deposit shall be accepted only on an application made by the depositor containing therein a declaration that as on the date of deposit, he is related to the specific director in the capacity of a relative as defined under the Companies Act, 1956 (1 of 1956);

(x) “public housing agency” shall include any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both;

(y) “securities ” means securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(z) “standard asset” means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business;

(za) “sub-standard asset” means -

(i) an asset, which has been classified as non-performing asset for a period not exceeding two years;

[Provided that with effect from March 31, 2005, an asset, which has been classified as non-performing asset for a period not exceeding twelve months shall be a sub-standard asset;]¹

(ii) an asset, where the terms of the agreement regarding interest and/or principal have been re-negotiated or rescheduled after release of any instalment of loan or an inter-corporate deposit which has been rolled over, until the expiry of one year of satisfactory performance under the re-negotiated or rescheduled terms :

Provided that where a delay in completion of a project is caused on account of factors beyond the control of the project implementing agency, terms of the loan agreement regarding interest and/or principal may be rescheduled once before the completion of the project and such loans may be treated as standard asset, subject to the condition that such reschedulement shall be permitted only once by the Board of Directors of the concerned housing finance company and that interest on such loan is paid regularly and there is no default;

Provided further that where natural calamities impair the repaying capacity of a borrower, terms of the loan agreement regarding interest and/or principal may be rescheduled and such loans shall not be classified as sub-standard; the classification of such loans would thereafter be governed by the revised terms and conditions;

(zb) “subordinated debt” means a fully paid up capital instrument, which is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the housing finance company. The book value of such instrument shall be subjected to discounting as provided hereunder:

to the extent such discounted value does not exceed fifty percent of the Tier-I capital;

(zc) “substantial interest” means holding of a beneficial interest by an individual or his spouse or minor child, whether singly or taken together in the shares of a company, the amount paid up on which exceeds ten percent of the paid up capital of the company; or the capital subscribed by all the partners of a partnership firm;

(zd) “tier-I capital” means owned fund as reduced by investment in shares of other housing finance companies and in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten percent of the owned fund;

(ze) “tier-II capital” includes the following:-

(i) preference shares (other than those compulsorily convertible into equity);

(ii) revaluation reserves at discounted rate of fifty five percent;

¹ Inserted by paragraph 4 of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27 th December,2002

(iii) general provisions and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses to the extent of one and one fourth percent of risk weighted assets;

(iv) hybrid debt;

(v) subordinated debt

to the extent the aggregate does not exceed Tier-I capital;

[(zf) ‘Tiny deposit' means the aggregate amount of public deposits not exceeding Rs. 10,000/- standing in the name of the sole or the first named depositor in the same capacity in all the branches of the Housing Finance Company.]¹

(2) Words or expressions used but not defined herein and defined in the National Housing Bank Act, 1987 shall have the same meaning as assigned to them therein. Any other words or expressions not defined herein or in the National Housing Bank Act, 1987 shall have the same meaning as assigned to them in the Reserve Bank of India Act, 1934 (2 of 1934), Banking Regulation Act, 1949 (10 of 1949) and the Companies Act, 1956 (1 of 1956);

(3) (a) If any question arises as to whether a company is a financial institution or not, such question shall be decided by the National Housing Bank in consultation with the Central Government.

(b) If any question arises as to whether a company is a housing finance company, the same shall be decided by the National Housing Bank.

CHAPTER II - ACCEPTANCE OF PUBLIC DEPOSITS

Restriction on acceptance of deposits

3 . (1) No housing finance company having net owned fund (hereinafter referred to as 'NOF') of less than twenty five lakhs of rupees shall accept public deposits.

(2) No housing finance company having NOF of twenty five lakhs of rupees and above shall accept or renew public deposits except to the extent specified below:-

(i) not exceeding five times of its NOF, where the housing finance company has obtained credit rating for fixed deposits not below 'A' from any one of the approved rating agencies at least once a year and a copy of the rating is sent to the National Housing Bank and it is complying with all the prudential norms; and

(ii) in the absence of credit rating as specified in (i) above, not exceeding two times of its NOF or ten crore of rupees, whichever is lower including any amount remaining outstanding in its books as on the date of acceptance or renewal of such deposit, subject to (a) it is complying with all the prudential norms, and (b) having capital adequacy ratio of not less than fifteen per cent as per the last audited balance sheet.

Approved Credit Rating Agencies

The names of approved credit rating agencies for the time being are as follows:-

•  The Credit Rating Information Services of India Ltd. (CRISIL)

•  ICRA Ltd.

(c) Credit Analysis & Research Ltd.(CARE)

(d) FITCH Ratings India Private Ltd.

¹ Inserted by Notification No.NHB.HFC.DIR.9/CMD/2005 dated 10 th January,2005

[(3) No housing finance company shall have deposits inclusive of public deposits, the aggregate amount of which together with the amounts, if any, held by it which are referred in clauses (iii) to (vii) of sub-section (bb) of Section 45 I of the Reserve Bank of India Act, 1934 (2 of 1934) as also loans or other assistance from the National Housing Bank, is in excess of sixteen times of its NOF.]¹

(4) Where a housing finance company holds as on the date of commencement of these directions public deposits in excess of the limits specified in (2) above and as applicable to it or deposits inclusive of the items mentioned in (3) above in excess of the limits specified in (3) above, it shall -

(a) not accept fresh deposit or open new deposit account; or

(b) not renew the existing deposit or where the deposits are received under any recurring scheme, receive instalments under such scheme after the expiry of the scheme period;

(c) reduce such excess deposit by repayment on maturity.

(5) In the event of down gradation of the credit rating to any level below ‘A' from the level earlier held by the housing finance company, it shall

•  report the position within fifteen working days to the National Housing Bank;

•  with immediate effect stop accepting fresh public deposit if the public deposit held by it is in excess of the limit specified under clause (ii) of paragraph 3(2) above; and

•  reduce within three years from the date of downgrading of credit rating, the amount of excess public deposit to nil or the appropriate extent permissible under clause (ii) of paragraph 3(2) above as the case may be, to which it is entitled to accept, by repayment as and when such deposit falls due or otherwise.

Period of deposits

4. No housing finance company shall accept or renew any public deposit:

(a) which is repayable on demand or on notice; or

(b) unless such deposit is repayable after a period of twelve months or more but not later than eighty four months from the date of acceptance or renewal of such deposits.

Explanation

Where a public deposit is in instalments, the period of such deposit shall be computed from the date of receipt of first Instalment.

Joint deposits

5. Where so desired, deposits may be accepted in joint names with or without any of the clauses, namely, “Either or Survivor”, “Number One or Survivor/s”, “Anyone or Survivor/s”.

Particulars to be specified in application form soliciting public deposits

6 (i) No housing finance company shall accept or renew any public deposit except on a written application from the depositors in the form to be supplied by the housing finance company, which form shall contain all the particulars specified in the Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977, made under section 58A of the Companies Act, 1956 (1 of 1956) and also contain the particulars of the specific category of the depositors, i.e. whether the depositor is a shareholder or a director or a promoter of the housing finance company or a member of public or a relative of a director of the company.

¹ Substituted by Notification No.NHB.HFC.DIR.4/CMD/2003 dated 31 st January,2003

(ii) The application form shall also contain the following:-

(a) the credit rating assigned for its deposits and the name of the credit rating agency which rated the housing finance company;

(b) a statement to the effect that in case of any deficiency of the housing finance company in servicing its deposits, the depositor may approach the National Consumers Disputes Redressal Forum, the State Level Consumers Disputes Redressal Forum or the District Level Consumers Disputes Redressal Forum for relief;

(c) a statement to the effect that in case of non-repayment of the deposit or part thereof in accordance with the terms and conditions of the deposit, the depositor may make an application to authorised officer of the National Housing Bank;

(d) a statement to the effect that the financial position of the housing finance company as disclosed and the representations made in the application form are true and correct and that the housing finance company and its Board of Directors are responsible for the correctness and veracity thereof;

•  a statement to the effect that the housing finance company is within the regulatory framework of the National Housing Bank. It must, however, be distinctly understood that the National Housing Bank does not undertake any responsibility for the financial soundness of the housing finance company or for the correctness of any of the statements or the representations made or opinions expressed by the housing finance company; and for repayment of deposit/ discharge of liabilities by the housing finance company;

•  the information, relating to and the aggregate dues from the facilities, both fund and non-fund based, extended to, and the aggregate dues from companies in the same group or other entities or business ventures in which the directors and/or the housing finance company are/is holding substantial interest and the total amount of exposure to such entities;

•  at the end of application form but before signature of the depositor, the following verification clause by the depositor shall be appended. “I have gone through the financial and other statements/ particulars/representations furnished/made by the housing finance company and after careful consideration I am making the deposit with the housing finance company at my own risk and volition.”

Introduction of depositors

7. Every housing finance company shall obtain proper introduction of new depositors before opening their accounts and accepting the deposits, and shall keep on its record the evidence on which it has relied for the purpose of such introduction.

Explanation :

For the purpose of this paragraph, introduction shall mean identification of the prospective depositor and may be done either by one of the existing depositors or on the basis of any one of Income Tax Permanent Account Number (PAN), Election Identity Card, Passport, or Ration Card.

Furnishing of receipts to depositors

8. (1) Every housing finance company shall furnish to every depositor or his agent, unless, it has done so already, a receipt for every amount which has been or which may be received by the housing finance company by way of deposit before or after the date of commencement of these Directions.

(2) The said receipt should be duly signed by an officer entitled to act for the housing finance company in this behalf and shall state the date of deposit, the name of depositor, the amount in words and figures received by the housing finance company by way of deposit, rate of interest payable thereon and the date on which the deposit is repayable.

Provided that, if such receipts pertain to Instalments subsequent to the first Instalment of a recurring deposit it may contain only name of the depositor/s, date and amount of deposit.

Register of deposits

9. (1) Every housing finance company shall keep one or more registers in which shall be entered separately in the case of each depositor or group of joint depositors the following particulars, namely,

(a) name and address of the depositor or group of joint depositors, their nominees,

(b) date and amount of each deposit,

(c) duration and due date of each deposit,

(d) date and amount of accrued interest or premium on each deposit,

(e) date and amount of each repayment, whether of principal, interest or premium,

(f) date of claim made by the depositor,

(g) the reasons for delay in repayment beyond five working days, and

(h) any other particulars relating to the deposits.

(2) The register or registers aforesaid shall be kept at each branch in respect of the deposit accounts opened by that branch of the housing finance company and a consolidated register for all the branches taken together at the registered office of the housing finance company and shall be preserved in good order for a period of not less than eight years following the financial year in which the latest entry is made of the repayment or renewal of any deposit of which particulars are contained in the register:

Provided that, if the housing finance company keeps the books of account referred to in sub-section (1) of Section 209 of the Companies Act, 1956 (1 of 1956) at any place other than its Registered Office in accordance with the provisions to that sub-section, it shall be sufficient compliance with this sub-paragraph if the register aforesaid is kept at such other place, subject to the condition that the housing finance company delivers to the National Housing Bank a copy of the notice filed with the Registrar under the proviso to the said sub-section within seven days of such filing.

Information to be included in the Board's Report

10. (1) In every report of the Board of Directors laid before the housing finance company in a general meeting under sub-section (1) of Section 217 of the Companies Act, 1956 (1 of 1956) after the date of commencement of these Directions there shall be included, the following particulars or information, namely:

(a) the total number of accounts of public deposit of the housing finance company which have not been claimed by the depositors or not paid by the housing finance company after the date on which the deposit became due for re-payment; and

(b) the total amounts due under such accounts remaining unclaimed or unpaid beyond the dates referred to in clause (a) as aforesaid.

(2) The said particulars or information shall be furnished with reference to the position as on the last date of the financial year to which the report relates and if the amounts remaining unclaimed or undisbursed as referred to in clause (b) of the preceding sub-paragraph exceed in the aggregate the sum of rupees five lakhs, there shall also be included in the report a statement on the steps taken or proposed to be taken by the Board of Directors for the repayment of the amounts due to the depositors or group of joint depositors and remaining unclaimed or undisbursed.

Ceiling on the rate of interest and brokerage and interest on overdue public deposits

11. [ 1(a) On and from 27 th March, 2003, no housing finance company shall invite or accept or renew any public deposit at a rate of interest exceeding eleven percent per annum. Interest may be paid or compounded at rests which shall not be shorter than monthly rests.

[1(aa) On and from 20 th September 2003, no housing finance company shall invite or accept or renew repatriable deposits from non-resident Indians in terms of Notification No. FEMA.5/2000-RB dated May 03, 2000 under Non-Resident (External) Account Scheme at a rate exceeding the rates specified by the Reserve Bank of India for such deposits with scheduled commercial banks.

Explanation: The period of deposits shall not be less than one year and not more than three years.]²

(b) No housing finance company shall pay to any broker on public deposit collected by or through him,

(i) brokerage, commission, incentive or any other benefit by whatever name called, in excess of two per cent of the deposit so collected;

(ii) expenses by way of reimbursement on the basis of relative vouchers/bills produced by him, in excess of 0.5 % of the deposit so collected.]¹

(2) Payment of interest on overdue deposit

A housing finance company may, at its discretion, allow interest on an overdue public deposit or a portion of the said overdue deposit from the date of maturity of the deposit subject to the conditions that -

(i) the total amount of overdue deposit or the part thereof is renewed in accordance with other relevant provisions of these Directions, from the date of its maturity till some future date, and

(ii) the interest allowed shall be at the appropriate rate operative on the date of maturity of such overdue deposit which shall be payable only on the amount of deposit so renewed:

Provided that where a housing finance company fails to repay the deposit along with interest on maturity on the claim made by the depositor, the housing finance company shall pay interest from the date of claim till the date of repayment at the rate as applicable to the deposit.

General provisions regarding repayment of deposits

[ 12. (i) No housing finance company shall repay any public deposit within a period of three months from the date of its acceptance.

(ii) Where a housing finance company at the request of depositor/s repays a public deposit after the period indicated in clause (i) above but before its maturity, it shall pay interest at the following rate:

¹ Substituted by Notification No.NHB.HFC.DIR.5/CMD/2003 dated 27th March,2003

² Inserted by Notification No.NHB.HFC.DIR.6/CMD/2003 dated 20th September,2003

(iii) A housing finance company may grant a loan up to seventy-five percent of the amount of public deposit to a depositor after the expiry of three months from the date of public deposit at a rate of interest two percentage points above the interest rate payable on the public deposit.

(iv) It is obligatory on the part of an HFC to intimate the details of maturity of the deposit to the depositor at least two months before the date of maturity of the deposit.

(v) all deposit accounts standing to the credit of sole/first named depositor in the same capacity shall be clubbed and treated as one deposit account for the purpose of premature repayment.

(vi) Provided that in the event of death of a depositor, the public deposit may be paid prematurely to the surviving depositor/s in the case of joint holding with the survivor clause, or to the nominee or legal heir/s with interest at the contracted rate up to the date of repayment.

(vii) For the purpose, HFCs are classified into two categories viz. a problem HFC and a normally run HFC. An HFC, which is normally run HFC, with effect from the date of this notification, can permit premature repayment of a public deposit after the lock-in period at its sole discretion only and premature closure can not be claimed as a matter of right by the depositors. The problem HFCs have been prohibited from making premature repayment of any public deposits or granting any loan against public deposits except in the case of death of the depositor or in the case of tiny deposit up to Rs.10,000/- in entirety or to enable the depositor to meet expenses of an emergent nature up to an amount not exceeding Rs.10,000/-.

A problem HFC is one which:

•  has refused or failed to meet within five working days any lawful demand for repayment of the matured public deposits; or

•  intimates the CLB under section 58AA of the Companies Act, 1956, about its default to a small depositor in repayment of any public deposit or part thereof or any interest thereupon; or

•  approaches the Bank for withdrawal of the liquid asset securities to meet its deposit obligations; or

•  approaches the Bank for any relief or relaxation or exemption from the provisions of Housing Finance Companies (NHB) Directions, 2001 or from that of Prudential Norms for avoiding default in meeting public deposit or other obligations; or

•  has been identified by the NHB to be a problem Housing Finance Company either suo moto or based on the complaints from the depositors about non-repayment of public deposits or on complaints from the company's lenders about non-payment of dues.]¹

¹ Substituted by Notification No.NHB.HFC.DIR.9/CMD/2005 dated 10th January, 2005

Provided that in the event of death of a depositor, the public deposit may be paid prematurely to the surviving depositor/s in the case of joint holding with the survivor clause, or to nominee or legal heir/s with interest at the contracted rate upto the date of repayment.

(iii) A housing finance company may grant a loan upto seventy-five percent of the amount of public deposit to a depositor after the expiry of three months from the date of public deposit at a rate of interest two percentage points above the interest rate payable on the public deposit.

Renewal of public deposit before maturity

13. Where any housing finance company permits an existing depositor to renew his public deposit before maturity for availing the benefit of higher rate of interest, such company shall pay the depositor the increase in the rate of interest provided,

(i) the public deposit is renewed in accordance with the other provisions of these directions and for a period longer than the remaining period of the original contract; and

(ii) the interest on the expired period of the public deposit is reduced by one percentage point from the rate at which the housing finance company would have ordinarily paid, had the deposit been accepted for the period for which such public deposit had run; any interest paid earlier in excess of such reduced rate is recovered/adjusted.

Safe custody of approved securities

14. (1) Every housing finance company shall entrust to one of the scheduled commercial banks designated by it on that behalf, in the place where the registered office of the housing finance company is situated, the unencumbered approved securities required to be maintained by it in pursuance of Section 29B of the National Housing Bank Act, 1987;

1 [Provided that where a housing finance company intends to entrust these securities to the Stock Holding Corporation of India Ltd. or to its designated banker at a place other than the place at which its registered office is located or to keep them in the form of Constituent's Subsidiary General Ledger Account with a scheduled commercial bank, or with a depository participant registered with Securities and Exchange Board of India under Securities and Exchange Board of India Act, 1992 (15 of 1992), it shall obtain the prior approval, in writing, of the National Housing Bank.]¹

2 [(2) the securities mentioned in sub-paragraph (1) above shall continue to be entrusted to such designated banker or to the Stock Holding Corporation of India Ltd. or the depository participant or held in the constituent's subsidiary General Ledger Account with the scheduled commercial bank for the benefit of the depositors and shall not be withdrawn or encashed or otherwise dealt with by the housing finance company except for repayment to the depositors]²

Provided that,

(1) a housing finance company shall be entitled to withdraw a portion of such securities proportionate to the reduction of its deposits duly certified to that effect by its auditors;

(2) where the housing finance company intends to substitute such securities, it may do so by entrusting substitute securities of equal value to the designated bank before such withdrawal.

Explanation

‘scheduled commercial bank' means a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) excluding a Regional Rural Bank or a Co-operative Bank.

¹ Substituted by Paragraph 5(1) of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27th December, 2002

² Substituted by Paragraph 5(2) of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27th December, 2002

Employee Security Deposit

15. A housing finance company receiving any amount in the ordinary course of its business as security deposit from any of its employees for due performance of his duties shall keep such amount in an account with a scheduled commercial bank or in a post office in the joint names of the employee and the housing finance company on the conditions that -

(1) it shall not withdraw the amount without the consent in writing of the employee; and

(2) the amount shall be repayable to the employee along with interest payable on such deposit account unless such amount or any part thereof is liable to be appropriated by the housing finance company for the failure on the part of the employee for due performance of his duties.

Advertisement and statement in lieu of advertisement

16. (1) every housing finance company soliciting public deposits shall comply with the provisions of the Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977 and shall also specify in every advertisement to be issued thereunder, the following :

(a) the actual rate of return by way of interest, premium, bonus or other advantage to the depositors;

(b) the mode of payment to the depositors;

(c) maturity period of deposits;

(d) the interest payable on a specified deposit;

•  the rate of interest which will be payable to the depositors in case the depositor withdraws the deposit prematurely;

•  the terms and conditions subject to which a deposit will be renewed;

•  any other special features relating to the terms and conditions subject to which the deposits are accepted/renewed; and

•  the information, relating to the aggregate dues (including the non-fund based facilities) provided to/from companies in the same group or other entities or business ventures in which the directors and/or the housing finance company are holding substantial interest and the total amount of exposure to such entities.

(2) where a housing finance company intends to accept public deposits without inviting or allowing or causing any other person to invite such deposits, it shall, before accepting deposits, deliver to the office of the National Housing Bank at New Delhi for registration, a statement in lieu of advertisement containing all the particulars required to be included in the advertisement pursuant to the Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977 as also the particulars stated in sub-paragraph (1) hereinabove, duly signed in the manner provided in the aforesaid Rules.

(3) A statement, delivered under sub-paragraph (2) shall be valid till the expiry of six months from the date of closure of the financial year in which it is so delivered, or until the date on which the balance sheet is laid before the housing finance company in general meeting, or where the annual general meeting for any year has not been held, the latest day on which that meeting should have been held in accordance with the provisions of the Companies Act, 1956(1 of 1956), whichever is earlier and a fresh statement shall be delivered in each succeeding financial year before accepting deposits in that financial year.

Opening of Branches

17. A housing finance company shall, before opening a branch or an office, inform National Housing Bank in writing of its intention to open a branch or an office.

Closure of Branches

18. No housing finance company accepting deposits shall close its branch/office without publishing such intention in any one national level newspaper and in one vernacular newspaper in circulation in the relevant place and without advising National Housing Bank, before ninety days of the proposed closure.

CHAPTER III - PRUDENTIAL NORMS

Income recognition

19 . (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

20 . (1) Income from dividend on shares of corporate bodies and units of mutual funds shall be taken into 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

21 . 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

22 . [(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;

(c) Investments in securities shall be classified into current and long term, at the time of making each investment;

(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 October 1, 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;

(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 scrips of the same category”.]¹

(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.,

•  equity shares,

•  preference shares,

•  debentures and bonds,

•  Government securities including treasury bills,

•  units of mutual fund, and

•  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 break up value, whichever is lower. Where the balance sheet of the investee company is not available for two years, such shares shall be valued at Rupee one per company.]²

[(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 rupee one per company.]³

¹ Substituted by Notification No.NHB.HFC.DIR.8/CMD/2004 dated 18th May,2004

² Substituted by Notification No.NHB.HFC.DIR.8/CMD/2004 dated 18th May,2004

³ Substituted by Notification No.NHB.HFC.DIR.8/CMD/2004 dated 18th May,2004

(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.

1 [Need for Policy on Demand/Call Loans

  22A. (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 cut off 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 cut off 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.]¹

Asset classification

23 . (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.

Provisioning requirement

24 . Every housing finance company shall, after taking into 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:-

¹ Inserted by Paragraph 6 of Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27th December,2002

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:

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 instalments 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 :

(iii) On expiry of a period of 12 months after the due date of the last instalment 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) (za) 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 re-scheduled on account of natural calamities having impaired the repaying capacity of the borrower as provided in second proviso to paragraph 2(1)(za), any provisioning made prior to such rescheduling shall neither be written back nor adjusted against any provisioning requirements that may arise in future.

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

Disclosure in balance sheet

25 . (1) Every housing finance company shall, separately disclose in its balance sheet the provisions made as per paragraph 24 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, doubtful and loss assets; and

(b) provisions for depreciation in investments

¹ Inserted by Notification No.NHB.HFC.DIR.3/CMD/2002 dated 27th December,2002

(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,

•  the details of the levy of penalty, if any, imposed on the housing finance company by the National Housing Bank and

•  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.]²

Requirement as to Capital Adequacy

26 . (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]¹

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 into account for reckoning the minimum capital ratio. The risk weighted asset shall be calculated as the weighted aggregate of funded items as detailed hereunder:

Notes:

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

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

•  Assets which have been deducted from owned fund to arrive at tier-I capital pursuant to paragraph 2(1)(zd) 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 (ca) 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.

¹ Substituted by Notification No.NHB.HFC.DIR.9/CMD/2005 dated 10th January,2005

² Substituted by Notification No.NHB.HFC.DIR.11/CMD/2005 dated 1 st October,2005

3 . Inserted by Notification No.NHB.HFC.DIR.13/CMD/ 2005 dated 19th December,2005

(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 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).]¹

Off-Balance Sheet items

•  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 into 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:-

•   

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.

1 Inserted by Notification No.NHB.HFC.DIR.3/CMD/ 2002 dated 27th December,2002

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

27. (1) No housing finance company, shall

 [(a) invest in land or building, 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'.”]¹

1 [ (b) acquire shares, convertible debentures of corporates and units of equity-oriented mutual funds, in excess of a ceiling of 5 per cent of the total outstanding advances (including Commercial Paper ) as on March 31 of the previous year. Within the overall ceiling of 5 per cent for total exposure to capital market, the total investment in shares, convertible bonds and debentures and units of equity-oriented mutual funds by a housing finance company should not exceed 20 per cent of its net worth.

Provided that the land or building or shares, convertible bonds or debentures of corporates or units of equity-oriented mutual funds 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 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;

Provided further that the land or building or shares, convertible bonds or debentures of corporates or units of equity-oriented mutual funds held by the company in excess of the ceiling specified hereinabove on the date of coming into force of the above provisions, shall be disposed off so as to bring down such holding within the said ceiling by the housing finance company within three years or within such period as extended by the National Housing Bank from the date of coming into force of these Directions.  

(2) 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.

¹ Substituted by Notification No.NHB.HFC.DIR.7/CMD/ 2003 dated 10th December,2003

(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 therefor 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.] 1

2 [(h) Housing Finance Companies (HFCs) may undertake securities transactions through stock brokers only on NSE/BSE/OTCEI] 2

Concentration of credit/investment

28 . (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; and

(b) the shares of a single group of companies exceeding twenty-five

percent of its owned fund;

(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.

(2) Any loan granted and investment made by the housing finance company in excess of the ceilings specified hereinabove and existing on the date of commencement of these directions, shall be brought down by the housing finance company as per the repayment schedule in due course.

Notes:

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

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

¹ Substituted by Paragraph 10 of Notification No.NHB.HFC.DIR.3/CMD/ 2002 dated 27th December,2002

2 Substituted vide Notification No.NHB.HFC.DIR.14/CMD/ 2005 dated 19 th December, 2005

(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.

CHAPTER IV - DIRECTIONS TO AUDITORS

Auditor's report to contain specified matters

29 . In addition to the report made by the auditor under section 227 of th