Housing Finance Companies (HFCs) are subject to specific NPA classification norms under RBI regulations. While HFCs are now largely aligned with banks on the 90-day delinquency norm, there are important differences in their regulatory framework and compliance requirements. This guide explains the NPA classification framework for HFCs and how it differs from banks.
The Statutory Framework
Definition of Housing Finance Company
Under Section 66(6) of the DTC, "housing finance company" means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.
Regulatory Framework
HFCs are regulated under:
- The National Housing Bank Act, 1987
- The Reserve Bank of India Act, 1934
- The Master Direction - Non-Banking Financial Company - Housing Finance Company (Reserve Bank) Directions, 2021
NPA Classification — The 90-Day Norm
Alignment with Banks
Under RBI circular dated November 12, 2021, an NBFC loan will be tagged as non-performing asset (NPA) if an overdue amount is not paid by the 90th day, just like it is for banks. This represents a significant shift from the previous regulatory approach, which often treated NBFCs differently.
Classification Criteria
A loan account of an HFC shall be classified as Non-Performing Asset (NPA) where interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a loan.
Out of Order Accounts
If an overdraft (OD) account is "out of order", the same shall be classified as NPA. An account is considered "out of order" if:
- The outstanding balance remains continuously in excess of the sanctioned limit or drawing power for 90 days; or
- The outstanding balance is less than the sanctioned limit but there are no credits continuously for 90 days
Key Differences from Banks
Regulatory Framework
| Aspect | Banks | Housing Finance Companies |
|---|---|---|
| Primary Regulator | RBI | RBI and NHB |
| Regulatory Directions | RBI Master Circulars | NHB Directions + RBI Directions |
| Deposit Acceptance | Yes | No (unless specifically permitted) |
| Payment Systems | Yes | No |
NPA Classification
| Aspect | Banks | Housing Finance Companies |
|---|---|---|
| Delinquency Norm | 90 days | 90 days |
| Classification Categories | Sub-standard, Doubtful, Loss | Sub-standard, Doubtful, Loss |
| Provisioning Requirements | As per RBI norms | As per RBI norms |
Provisioning Requirements
While the classification norm is now aligned, provisioning requirements may differ based on the specific regulatory framework applicable to HFCs.
NPA Classification Categories for HFCs
Sub-Standard Assets
An asset is classified as sub-standard if it has remained NPA for a period up to 12 months. Provisioning requirement: As per RBI norms.
Doubtful Assets
An asset is classified as doubtful if it has remained NPA for a period exceeding 12 months. Provisioning requirements vary based on the duration of the NPA.
Loss Assets
An asset is classified as loss if it is considered uncollectible and has been identified as loss by the institution or the auditors. Provisioning requirement: 100%.
Special Considerations for HFCs
Housing Loans
Housing loans have longer tenures and different risk characteristics compared to other types of loans. This is reflected in the provisioning norms for HFCs.
Project Loans
HFCs may also finance housing projects, which have different risk characteristics compared to individual housing loans.
Securitisation
HFCs may securitise their housing loan portfolios, which has implications for NPA classification and provisioning.
Tax Implications
Deduction for Provision
Under Section 31(1) of the DTC, HFCs are eligible for deduction for provision for bad and doubtful debts up to 5% of the total income (computed before making any deduction under this clause and Chapter VIII).
Deduction for Bad Debt Write-Off
Under Section 31(2), any amount of bad debt written off as irrecoverable is eligible for deduction, subject to conditions.
Disallowance of NPA Provision
Provisions for NPAs made as per RBI norms may be disallowed by tax authorities when assessing income tax liabilities. Only the amount actually written off as irrecoverable is eligible for deduction under Section 31(2).
Practical Compliance
For HFCs
Housing Finance Companies must:
- Identify NPAs as per the 90-day delinquency norm
- Classify NPAs into sub-standard, doubtful, and loss assets
- Make provisions as per RBI norms
- Claim deduction for provisions under Section 31(1)
- Write off bad debts as irrecoverable
- Claim deduction for bad debts written off under Section 31(2)
Documentation Requirements
HFCs should maintain:
- Records of due dates for each loan account
- Records of overdue periods
- Classification records
- Provisioning records
- Write-off records
Impact of NPA Classification Changes
Financial Impact
Credit rating agency ICRA estimates that the new norms could take NBFC NPAs up by 160-180 basis points whereas the spike in the case of housing finance companies (HFCs) could remain somewhere between 60-80 basis points over March 2021 levels.
Operational Impact
HFCs need to:
- Implement systems for timely identification of NPAs
- Strengthen their recovery mechanisms
- Enhance their provisioning
- Improve their risk management frameworks
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on NPA classification for Housing Finance Companies. Our direct tax experts help HFCs understand their obligations, implement compliant systems, and navigate the regulatory framework. We assist in NPA identification, provision computation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on NPA classification or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex NPA classification framework for HFCs requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- NPA Identification: Guidance on NPA identification and classification
- Provision Computation: Assistance with computation of provisions
- Compliance Advisory: Guidance on ongoing compliance requirements
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your NPA classification matters.