NATIONAL HOUSING BANK

(Wholly owned by the Reserve Bank of India )

New Delhi

THE HOUSING FINANCE COMPANIES (NHB) DIRECTIONS, 2001

No. NHB.HFC.DIR.3/CMD/2002 dated 27 th December 2002

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 so to do, hereby in exercise of the powers conferred by Sections 30A and 31 of the National Housing Bank Act, 1987 (53 of 1987) and all the powers enabling it in this behalf, directs that the Housing Finance Companies (NHB) Directions, 2001 shall, with immediate effect, be further amended in the following manner, namely:

1. In paragraph (2), in sub-paragraph (1) in clause (h) the following proviso shall be inserted, namely,-

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;

2. In paragraph (2), in sub-paragraph (1) in clause (p), for sub-clause (ii), the following shall be substituted, namely,-

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

• non-availability of security, either primary or collateral, in case of secured loans and advances;
• erosion in value of security, either primary or collateral, is established;
• insurance claim, if any, has been denied or settled in part;
• fraudulent act or omission on the part of the borrower;
• the debt becoming time barred under Limitation Act, 1963 (36 of 1963);
•   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.”

In paragraph (2), in sub-paragraph (1) in clause (t) the following proviso shall be inserted, namely:

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

•   an asset, in respect of which, interest has remained overdue for a period of ninety days or more
•   a term loan inclusive of unpaid interest, when the instalment is overdue for a period of ninety days or more on which interest amount remained overdue for a period of ninety days or more;
•   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;
• a bill which remains overdue for a period of ninety days or more;
•   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;
•   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;
•   the lease rental and hire purchase instalment, which has become overdue for a period of ninety days or more;
• an inter-corporate deposit, in respect of which interest or principal has remained overdue for a period of ninety days or more.

4. In paragraph (2), in sub-paragraph (1) in clause (i) of clause (za), the following proviso shall be inserted, namely,-

“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.”

5. In Paragraph 14-

 (1) In sub-paragraph (1), for the existing provisos, the following proviso shall be substituted, namely,-

 “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 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.”

(2) In sub-paragraph (2), the following sub-paragraph shall be substituted, namely,-

“(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 the repayment to the depositors.”

6. After paragraph 22, the following paragraph 22A shall be inserted, namely,-

 “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,-

•    A cutoff date within which the repayment of demand or call loan shall be demanded or called up;
•   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 a period of one year from the date of sanction;
• The rate of interest which shall be payable on such loans;
•   Interest on such loans, as stipulated shall be payable either at monthly or quarterly rests;
•   The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if no interest is stipulated or moratorium is granted for any period;
• A cutoff date, for review of performance of the loan, not exceeding six months commencing from the date of sanction;
•   Such demand or call loans shall not be renewed unless the periodical review has shown satisfactory compliance with the terms of sanction.

7. In paragraph 24, after note 4, the following shall be inserted, namely:

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

8. In paragraph 26, in sub-paragraph (1) in clause (ii), for the words “on or before March 31, 2002 , the following shall be substituted, namely,-

“on or before March 31, 2002 and thereafter.”

9. In paragraph 26, in explanation (1),-

(1) In sub-explanation (2), after item (c) the following proviso shall be inserted, namely:

(2) In sub-explanation (3), for item (a), the following shall be substituted, namely:

(3) In the notes, after Note (3), the following shall be inserted, namely:

“(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 therefore and the receivables thereunder by the originating housing finance company or scheduled commercial bank in favour of the trust or the securitization 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 therfor 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;

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

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

•  does not have any of its director, officer, or employee on the Board of the 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;

•  does not directly or indirectly control the trust or the securitisation company; and

•  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 up on 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 trustee appointed to manage the issue is governed by the provisions of Indian Trusts Act, 1882 (2 of 1882).

10. Paragraph 27 shall be substituted by the following namely,-

“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 ten per cent of its owned fund,

(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 in to 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.

(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.

Exceptions:

Note: Housing finance companies may undertake securities transactions through members of the National Stock Exchange (NSE), OTC Exchange of India (OTCEI) and the Stock Exchange, Mumbai(BSE). If such transactions are not undertaken on the NSE, OTCEI or BSE, the same should be undertaken by housing finance companies directly, without engaging brokers.

11. In paragraph 35, the following explanation shall be inserted, namely,-

“Explanation

The Audit Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in section 292A of the Companies Act, 1956 (I of 1956).”

12. In Schedule II:

(1) the existing title of Part-I shall be substituted by the following, viz.-

“Part-I-Particulars regarding investments in premises and exposure to stock markets”

(2) the existing clause (ii) of Part-I shall be substituted by the following, viz.-

(3) for the formats of certificate and Auditor’s Report appended thereto, the following shall respectively be substituted, namely,-

“Certificate

Certified that

(1)   the data/information furnished in this statement are in accordance with the Housing Finance Companies (NHB) Directions, 2001. The statement has been compiled from the books of account and other records of the company and to the best of my knowledge and belief they are correct;

(2)   the company has accepted public deposit and the quantum of such deposit is within the limits applicable to the company;

(3)   the company has not paid interest/brokerage on deposit beyond the ceiling prescribed under the Directions;

(4)   the company has not defaulted in repayment of matured deposit;

(5)  the credit rating for fixed deposits assigned by credit rating agency, viz.   at  (rating level) is valid;

(6)   the capital adequacy disclosed in Part C of the return after taking into account the particulars contained in Parts, D, E and F has been correctly worked out;

(7)   the aggregate of amount outstanding in respect of loans, equipment leasing, hire purchase finance and investment held together with other assets of the company during the half year ended March/September    is taken into account to ensure that the minimum stipulated capital adequacy ratio as applicable to the company has been maintained through the relevant period on an ongoing basis;

(8)  classification of assets as disclosed in Part F of the return has been verified and found to be correct. No roll-over/rephasement of loans, lease and hire purchase transactions and bills discounted beyond due dates has been observed. The sub-standard or doubtful or loss asset, if upgraded, has been done so, in conformity with relevant provisions of the Directions;

(9)   investment in group companies as disclosed in Part G of the return and exposures to individuals/firms/other companies exceeding the credit / investment concentration norms as disclosed in Part H of the half-yearly return, investments in premises and exposure to stock market as disclosed in Part I of the return and particulars on suit filed and decreed debts by the company and against it as disclosed in Part K of the return and classification of such asset is correct; and

(10)  net owned fund as per Tier-I capital of the company has been correctly worked out.

For and on behalf of                            (name of the company)

Auditor’s Report

We have examined the books of accounts and other records maintained by _____________________________Company Limited in respect of the capital funds, risk assets/exposures and risk asset ratio etc., as on __________________ and statements/certificate hereinabove made by the Managing Director/Chief Executive Officer of the company or his authorised representative. On the basis of random checking, we certify the statement in paragraph 7 above. We further report that to the best of our knowledge and according to the information and explanations given to us and as shown by the record examined by us the figures shown in  Parts A, B, C, D, E, F, G, H, I, J and K of the  statement hereinabove  are correct.

Sd/-

(V. Sridar)

Chairman & Managing Director