Article. Housing Finance Procedure for application with the NHB. 22 nd September, 2015

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1 Housing Finance Procedure for application with the NHB Shruti Agarwal Abhirup Ghosh 22 nd September, 2015 Check at: for more write ups. Copyright: This write up is the property of Vinod Kothari Consultants Private Limited and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 Background Ever since the independence, there has been a frantic need for housing in India; consequently, the same has led to an increase in demand for housing finance in the country. It was just a matter of time that housing became one of the most favorite agenda for the policy makers and housing and housing finance began to gain more and more popularity during each year s budget. Even after the continuing efforts of the policy makers, there is still a lot to achieve in the sector. In India, apart from banks, financial institutions play a pivotal role in infusing finance in the uncharted sectors which remain in isolation due to higher cost of funds, remoteness of the area etc. One of the major component that fuels this growth process is robust infrastructural development especially for the Housing finance industry. The sector which has been quite settled till now, recently, has seen a lot of movement as there has been a spurt in the number of applications submitted to National Housing Bank (NHB) seeking registrations for housing finance companies. While there may several reasons for this increasing interest in the sector, but it is the increasing demand in the affordable housing finance segment which is luring the investors to jump into this sector. As we all know, the law mandates the formation of a housing finance company for carrying out housing financing activities dedicatedly. Considering the growing interest in this sector, we have come up with this article to give you an overview of how to make an application with the NHB for obtaining the Certificate of Registration (CoR) including the tentative timeline during which the NHB may accept/reject the application, the due diligence carried by the NHB, the reporting required to be done by the company submitting the application. Mandates from the National Housing Bank Act, 1987 (the NHB Act): Section 29A of the NHB Act specifically provides that no Housing Finance Company shall commence or carry on the business of a housing finance institution without 1. obtaining a certificate of registration from National Housing Bank issued under Chapter V of the said Act, and

3 2. having the net owned fund of twenty five lakhs rupees or such other higher amount, as the National Housing Bank may, by notification, specify. However, the NHB revised the minimum owned fund requirements and increased the same to Rs. 10 crores with effect from April 1, Procedure to apply for CoR: The following steps shall give a quick understanding of the methodology including the submission of relevant documents and other incidental requirements to be complied with while preparing for application to be submitted to NHB for obtaining the CoR. Step 1: Change in name of the company In case the applicant is an existing company, it should change its name to include the word housing finance in the company s name for whose registration application is being submitted. Accordingly, the company shall apply for a fresh certificate of incorporation pursuant to change in its name. The copy of the certificate of incorporation shall be submitted along with the application form with NHB. Step 2: Infusing capital in the Company to attain the minimum net owned funds requirement Next the promoters are required to bring in the minimum net owned funds of the Company for making the application. The NHB accepts the application only once it is satisfied that the Company has complied with this requirement. During the pendency of the application, the Company is not allowed to utilize the money in anyway. However, NHB allows the money to be parked in a Fixed Deposit with a bank until it gets the nod from the NHB. Step 3: Application form The applicant company is required to submit a physical copy of the application (in duplicate) along with the necessary documents to the Head Office of the National Housing Bank. The application form can be viewed at the following link: Following are the list of documents to be annexed with application form to be submitted in the format provided in the link provided above:

4 Sl. No. Particulars 1) A demand draft of Rs. 10,000/-, which shall be non-refundable, in favour of the National Housing Bank payable at New Delhi. 2) Certificate of fixed deposit of Rs. 10 crore. 3) Board Resolution specifically approving the submission of application and its content; 4) Certification of statutory auditors regarding the Net Owned Funds of the company; 5) Certified copy of the Memorandum and s of Association, as amended in case of an existing company, to accommodate housing finance as the principal business activity of the Company. 6) Business Plan of the Company, along with the projections of the investments and income for the first few years of the business. 7) Particulars of identification comprising of name of the company, date of incorporation, address of registered office, bank details etc; 8) Particulars of Chairman/MD/Directors/CEO etc; 9) Financials of the last three years, in case of companies which were in operation before making application, if applicable; 10) Returns on Prudential Norms for the latest period, if applicable; 11) Other Enclosures, if any: This may include additional declarations made by the Company with respect to the Application or the enclosures, as discussed above. Post submission of application with NHB: Post receipt of the application form and the related documents, the application is subject to scrutiny the documents submitted. Section 29A sub-section 4 of the NHB Act states the conditions basis which NHB may grant CoR to the applicant.

5 The conditions are reproduced below: (a) that housing finance institution is or shall be in a position to pay its present or future depositors in full as and when their claims accrue; (b) that the affairs of the housing finance institution are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors (c) that the general character of the management or the proposed management of the housing finance institution shall not be prejudicial to the public interest or the interests of its depositors; (d) that the housing finance institution has adequate capital structure and earning prospects; (e) that the public interest shall be served by the grant of certificate of registration to the housing finance institution to commence or to carry on the business in India; (f) that the grant of certificate of registration shall not be prejudicial to the operation and growth of the housing finance sector of the country; and (g) any other condition, fulfilment of which in the opinion of the National Housing Bank, shall be necessary to ensure that the commencement of or carrying on the business in India by a housing finance institution shall not be prejudicial to the public interest or in the interests of the depositors. Practical View: Practically, the entire process may take around six months post submission of the application to actually materialize into any information or intimation to be received from NHB. The officials at NHB carries out detailed due diligence of the application form submitted. Due diligence may include official visits by the NHB officials at the proposed HFC s registered office.

6 The purpose of these visits is to ensure that the Promoters of the Company have a bona fide intent to carry out the business, whether the Company has adequate systems to carry out the business activities. However, this does not mean that the Company shall have to install the entire system to carry out the business, at the time of the inspection; a proper plan for installation of the systems would suffice. Apart from the above, the NHB might also seek additional information from the Promoters and the obtain no objection certificates from the bankers of the Company and other regulators like the Ministry of Corporate Affairs, Reserve Bank of India, Securities and Exchange Board of India etc. before granting fresh certificate of registration. Conclusion: There is a dire need to infuse a large amount of capital in the housing finance industry to gain momentum in the pace of development in the housing sector. Despite the huge demand the of funds in the sector, the NHB is taking the calculated steps while granting fresh certificate of registration to carry out housing finance business, which, in a way is the best way to maintain a healthy environment in the housing finance sector. Please note: The procedure provided above is based on our study and research. It gives a basic view of the mandatory requirements under NHB that are to be complied with while making an application for obtaining a CoR to carry out housing finance activities. Our other write ups on similar topics can be viewed at: