The Ministry of Finance’s recent decision bestowing regulatory authority over Housing Finance Companies (HFCs) to the banking regulator RBI is likely to boost investor confidence, though market experts aren’t ruling out regulatory arbitrage. Last week, as part of the Union Budget announcements, finance minister Nirmala Sitharaman announced a landmark decision shifting regulatory authority of HFCs from National Housing Bank (NHB) to RBI.
Incidentally, NHB was part of the central bank until April, when the government folded it into its arms. Currently, there are 82 HFCs operating in the country though the top five players including HDFC and DHFL account for over 90 per cent of the housing finance market.“NHB, besides being the re-financier and lender, is also a regulator of the housing finance sector. This gives a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulatory authority over the housing finance sector from NHB to RBI,” said finance minister Nirmala Sithamaraman in her Budget speech.
Experts say the move will ensure that there remains enhanced regulatory supervision for both NBFCs and HFCs. The latter, which has until now been under limited regulation, is likely to face intense scrutiny. “Shifting regulatory authority of housing finance companies from NHB to RBI - positive given proactive regulator, but the possibility of a reduction in companies’ regulatory arbitrage cannot be ruled out,” said Kunal Shah of Edelweiss Research.
Besides widened the regulatory ambit, the sector, under the RBI’s fold, is likely to receive liquidity support directly from the regulator whenever the need arises. For instance, following the ongoing liquidity crisis in the NBFC and HFC sector, companies have been under intense pressure to raise capital. In fact, wasting no time, the central bank pressed into action opening up a liquidity window to banks to help support NBFCs and HFCs soon after the Union Budget presentation last week. According to brokerages, the shift in regulatory authority may not be without any interim challenges given the possible realignment of regulations on capital adequacy ratio, leverage ratios, cap on deposits etc.