Financial regulation is a form of regulation or supervision, with certain requirements, restrictions and guidelines which are required to be followed by financial institutions in order to maintain the integrity of the financial system. Regulatory reporting, is necessarily done to ensure compliance in both the private and public sectors. Depending on the type of reporting, it can be managed either internally or externally by regulatory bodies.
Banks have a vast branch network throughout the country and have a very crucial position in the financial system. Thus they play a major part in providing credit to the housing sector.
Complying with the aims of the National Housing Finance Policy of the Central Government, RBI had introduced a scheme of Housing Finance Allocation where it was required for banks every year to achieve the prescribed target of 'Housing Finance' announced annually.
Banks, on the other hand, have to also follow the RBI guidelines while formulating their policies, and make sure that bank credit is used for production and construction activities and not for any activities connected with speculation in real estate.
The Reserve Bank of India (RBI) regulates bank lending to housing and the National Housing Bank (NHB) regulates lending to housing by Housing Finance Companies or HFCs. Some of the regulations imposed by the RBI on banks also impact HFCs indirectly - such as priority sector lending targets.
NHB is an apex level financial institution catering to the needs of the housing sector in the country. It was established on July 9, 1988. It works towards promoting housing finance institutions or providing assistance to other similar institutions. As per the National Housing Bank Act of 1987, the National Housing Bank is authorised to control the housing finance system of the country, and look after its wellbeing by remove any deterrent that hampers the interest of depositors or is unfavourable to the interest of the housing finance institutions in general. It provides finances for housing loans and project loads to different primary lenders. The NHB also provides loans and financial assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act.
There are certain guidelines for participating in the equity of housing finance companies. NHB also has the promotional role of issuing these guidelines and guaranteeing the bonds to be issued by the housing finance companies. Besides the lending operations, NHB has a dedicated Training Division which conducts regular training programs in areas relating to housing and housing finance for development of management capabilities of officials working in the financial sector.
NBH's regulatory role is one of its most important functions. This role gains more significance as the housing finance system in India enters a secondary phase of development in terms of integration with the debt and capital markets. The case for regulation also rises from the need for credible and stable housing finance system in the country. Keeping the free market approach unhindered, NHB has attempted to put in place an effective system of responsive regulation.
The housing finance system is in the nascent stage in the country and therefore it is necessary to have a great deal of stability in terms of resource development, policy development and institution building. NHB has come up with a set of guidelines for recognising Housing Finance companies (HFCs) for its financial assistance, guidelines for financial assistance. Moreover, it has also released guidelines for prudential norms for income recognition, asset classification etc. NHB also has the task of regulating deposits taking activity, of the housing finance companies. In terms of section 29A of the National Housing Bank Act, 1987 it is compulsory for each of the housing finance companies to obtain a registration certificate from NHB before starting of any business relating to housing finance.
It has been estimated that the housing requirements till 2012 in India is around 74 million units out of which nearly 90% of the total housing units in both the rural and urban areas are for the poor and low income segment households. Though the growth of housing finance is about 30% in the last few years it has not been able to satisfy the requirements of the poor sections of the society. So the NHB not only needs to develop a new financial architecture but also policy and regulatory framework for affordable housing on sustainable lines for the weaker sections of the society. The recent initiatives taken in this direction include interest subsidy scheme for urban poor, top up loan scheme, emphasis on public private partnership focussing on housing for poor, JNNURM for bringing appropriate policy and legal reforms for providing affordable housing to poor.
So for all these to materialize, synchronization is needed between the Government, Reserve bank of India (RBI) and NHB. Entities like public agencies, financial institutions and builders also should be incentivised so that NHB can go ahead and reach its goals.