- Introduction
Housing Finance Companies (“HFCs”) play an essential role in the Indian financial ecosystem by providing loans to individuals and businesses for purchasing, constructing, or renovating residential properties.HFCs are a significant contributor to the growth of the housing sector, and their role in boosting the economy is critical, especially in a developing country like India where the housing gap is substantial.
The Reserve Bank of India (“RBI”) from the last few months has been working towards aligning the regulations for HFCs with the extant regulations applicable to non-banking financial companies (“NBFCs”). This initiative comes in response to the evolving financial landscape and aims to enhance the stability and operational efficiency of HFCs. One key aspect of this alignment is the stricter regulatory framework for accepting public deposits, which is already in place for NBFCs. By extending these provisions to HFCs, RBI seeks to maintain a uniform approach for managing systemic risks and improving the resilience of financial institutions that play an important role in the housing sector.
One of the primary ways HFCs raise capital from the capital markets for their lending activities is through the issuance of non-convertible debentures (“NCDs”). This financial instrument has proven to be an efficient method of financing for HFCs, as they provide an avenue to attract both institutional and retail investors. However, in recent years, the regulatory framework governing HFCs and their ability to issue NCDs has undergone significant changes. This evolution reflects a broader transformation in India’s financial sector, as regulators seek to ensure a stable, transparent, and sustainable environment for both lenders and borrowers.
This article examines the role of HFCs in India, the significance of NCDs in their capital structure, the changing regulatory landscape that governs their issuance and the future outlook of HFCs.
2. Regulatory Landscape for HFCs issuing NCDs
The regulatory framework surrounding HFCs and their issuance of NCDs has evolved significantly over the years, shaped by changing economic conditions, market dynamics, and the need to maintain financial stability in the housing finance sector.
In the early stages, there were limited regulations specifically addressing the issuance of NCDs by HFCs. The concept of HFCs began gaining popularity in the 1980s, and the National Housing Bank (“NHB”) was established in 1988 to regulate and promote the housing finance sector in India. The regulatory framework during that time was minimal, as the industry was still in its nascent stages.
However, as HFCs started to grow, the need for clear and comprehensive regulations became evident. The government and regulatory bodies, including the NHB, took steps to ensure that HFCs operated within a structured framework to safeguard investors’ interests and maintain financial stability in the housing sector.
HFCs in India operate under a multifaceted regulatory framework that involves various institutions. The primary regulatory authority is the NHB, which governs the operations of HFCs under the National Housing Bank Act, 1987. The NHB issues guidelines related to capital adequacy, liquidity, asset quality, and other operational aspects. The NHB ensures that HFCs operate under prudent financial and regulatory guidelines, ensuring their sustainability and their ability to support the housing sector. The RBI plays an indirect but significant role in regulating the financial health and stability of HFCs and their issuance of NCDs.
In addition to the NHB and RBI, the Securities and Exchange Board of India (“SEBI”) regulates the issuance of listed NCDs by HFCs, especially when these instruments are offered to the public. SEBI has regulations in place for public offers and private placements of debt securities, with a focus on protecting the interests of investors.
Together, these institutions provide a comprehensive regulatory framework that governs the issuance of NCDs by HFCs in India, balancing financial stability, market integrity, and investor protection.
3. The Role of NCDs in the capital structure of HFCs
HFCs require substantial capital to fund their core operations, which primarily involve disbursing loans for housing projects. The capital structure of HFCs typically includes a mix of equity, debt, and hybrid instruments, with NCDs being one of the most important debt instruments.
The issuance of NCDs allows HFCs to raise significant amounts of capital without diluting ownership, as is the case with equity. This is particularly important for privately held HFCs that want to retain control over their operations while expanding their capital base. The issuance of NCDs strengthens the debt portion of the capital structure, helping HFCs to meet their liquidity and capital adequacy requirements. NCDs are particularly important during periods of high demand for housing finance, as they provide a stable and predictable source of funding.
4. Recent Regulatory Changes Impacting NCD Issuance by HFCs
In January 2025, RBI issued a circular to revise the regulations for the private placement of NCDs having maturity of more than one year by HFCs. The regulations for the private placement of NCDs by HFCs are now aligned with those applicable to NBFCs.
Historically, HFCs have had their own set of guidelines under the Master Direction on Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021. However, the regulations governing HFCs and NBFCs were not fully aligned, despite the fact that both types of institutions operate in the broader financial ecosystem. The move to harmonize the regulatory guidelines for the private placement of NCDs aims to streamline these processes, ensuring a more uniform framework that can be applied across both sectors.
Key Changes in the Regulatory Framework
a) Auditor’s certification
One of the significant changes brought about by the revised guidelines is that the requirement to obtain a certification from an auditor to ensure compliance with certain financial norms has been removed.
However, it is important to note that this does not mean auditors are no longer involved in the financial scrutiny of HFCs. Auditors will still perform other essential duties such as auditing financial statements and ensuring transparency, but the certification specifically related to compliance with certain regulations has been removed. The auditors will be required to provide a peer-to-peer certificate in respect of each issuance.
b) Categorization of NCDs
This segmentation is made to differentiate between the smaller and larger investment group and the regulatory requirements will vary accordingly.
-
- NCDs with a maximum subscription of less than INR 1 Crore per subscriber: Under this category, the number of primary subscribers are capped. This restriction ensures that the issuance is kept relatively controlled and manageable, reducing the risks associated with a large number of individual investors. Additionally, these NCDs must be fully secured, which means that investors will have some form of collateral or guarantee backing the NCDs, offering additional security in case of a default.
- NCDs with a minimum subscription of INR 1 Crore and above: Under this category, NCDs will be available to investors who are willing to make substantial investments. The higher minimum subscription ensures that only institutional or high-net-worth investors are involved in this segment, aligning the fundraising efforts with a more sophisticated investor base. Additionally, these NCDs can be unsecured and such NCDs will not be treated as a deposit.
This categorization aims to prevent the dilution of regulatory oversight and ensures that appropriate safeguards are in place for different types of investors. The restriction on the number of investors reflects the RBI’s aim to balance investor access with the need for careful risk management and transparency. This approach also safeguards the interests of smaller investors by preventing them from getting involved in overly complex or high-risk financial instruments without appropriate safeguards.
5. Future outlook for HFCs and NCDs
As the housing sector continues to evolve, the role of HFCs and NBFCs is likely to expand further. The demand for affordable housing is expected to remain strong, especially in developing economies where urbanization and population growth continue to drive the need for new housing units. Technological advancements in the financial sector are likely to have a significant impact on the issuance of NCDs. These innovations could make the process more efficient, transparent, and accessible to a broader range of investors. Digitalization may also lead to more efficient processes and better investor access.
The regulatory trend seems to be heading toward more stringent norms for NCD issuances. This could include higher disclosure requirements, better risk management practices, and more conservative leverage limits.
As the market continues to evolve, HFCs must adapt to these regulatory changes while leveraging new opportunities for growth. By aligning with these regulations and maintaining a strong focus on financial inclusion, HFCs can continue to play a key role in addressing India’s housing needs, ultimately contributing to the country’s economic development.
6. Key Takeaways
The regulatory landscape for HFCs and the issuance of NCDs has evolved significantly in recent years. While these changes have posed challenges for HFCs, they also offer opportunities to strengthen financial stability, enhance investor protection, and promote transparency. By adapting to these regulatory shifts, HFCs can continue to play a crucial role in the capital structure of HFCs, providing them with the necessary funds to meet the growing housing needs of the population while maintaining a sustainable growth trajectory in an increasingly complex financial environment.
As the financial sector continues to evolve, HFCs will need to adapt to these changes, ensuring that they remain competitive, transparent, and capable of managing the risks associated with issuing NCDs. With the continued support of regulators and investors, HFCs are well-positioned to drive the growth of the housing finance sector in the coming years.
The RBI’s revised guidelines for the private placement of NCDs by HFCs mark a crucial step toward bringing more consistency, uniformity and transparency to the housing finance sector. By aligning these regulations with those of NBFCs, the RBI ensures that HFCs adopt better governance practices, stronger investor protections, and more structured fundraising approaches. This regulatory change ensures that HFCs adopt a structured and risk-reduced approach, similar to the NBFCs, when raising funds through private placements. By requiring a board-approved policy and investor protections, the RBI seeks to strengthen financial stability and boost investor confidence in the housing finance sector.
Under the revised norms, HFCs will need to adjust their fundraising strategies to meet the revised regulatory framework, reinforcing governance and risk management practices within the industry. These changes are expected to benefit both investors and institutions, contributing to the overall stability and growth of the housing finance sector in India.
Looking ahead, the demand for housing finance is expected to remain strong, and NCDs will continue to play a critical role in the capital structure of HFCs. Regulatory developments, technological innovations, and growing investor interest are likely to shape the future of NCD issuance in the housing finance sector, making it an exciting space to watch in the coming.
Authors: Apurva Kanvinde and Harshit Khandelwal