Revised Master Direction for Housing Finance Companies

The Reserve Bank of India (RBI) on June 20, 2023, issued updated Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 enabling the Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any Housing Finance Company (HFC) from being conducted in a manner detrimental to the interest of investors and depositors or in any manner prejudicial to the interest of such HFCs.

The revised guidelines provides following corporate governance guidelines. They are applicable to all public deposit accepting/holding HFCs and non-public deposit accepting HFCs with assets size of Rupees Fifty crore and above, based on the last audited balance sheet. However, HFCs with asset size lower than Rupees Fifty crore are encouraged to voluntarily follow these guidelines to promote good governance and risk management practices.

Constitution of Committees of the Board:

1. Audit Committee: All HFCs must constitute an Audit Committee consisting of at least three members of its Board of Directors. The committee’s responsibilities and functions shall align with the provisions of Section 177 of the Companies Act, 2013. Additionally, an Information System Audit, conducted by a Certified Information System Auditor (CISA), should be carried out at least once every two years to assess operational risks.
2. Nomination and Remuneration Committee: Every HFC should form a Nomination and Remuneration Committee to ensure the “fit and proper” status of directors and establish a proper framework for their remuneration. The committee’s powers, functions, and duties should be in line with the relevant provisions of Section 178 of the Companies Act, 2013. Conflict of interest in director appointments should be avoided, and their independence should be safeguarded.
3. Risk Management Committee: To effectively manage integrated risks, all HFCs must establish a Risk Management Committee in addition to the Asset Liability Management Committee.

Appointment of Chief Risk Officer

HFCs with asset size exceeding ₹5000 crore are required to appoint a Chief Risk Officer (CRO) with clearly defined roles and responsibilities. The CRO should possess adequate professional qualifications and experience in risk management. The appointment should have a fixed tenure with the approval of the Board, and any premature transfer or removal of the CRO must be reported to the National Housing Bank (NHB) and, if listed, to the stock exchanges. The independence of the CRO should be safeguarded, and the CRO should report directly to the MD & CEO/Risk Management Committee (RMC) of the Board. The CRO’s involvement in risk identification, measurement, and mitigation should be integral to the decision-making process, particularly in assessing credit proposals.

Fit and Proper Criteria

All HFCs should establish a policy approved by the Board for ascertaining the “fit and proper” criteria for directors during their appointment and on an ongoing basis. Additional information about directors should be obtained through a declaration, undertaking, and Deed of Covenant. Quarterly statements on changes in directors, along with a certificate from the Managing Director, must be submitted to the NHB within the specified timeline.

Disclosure and Transparency

HFCs are required to disclose specific information to ensure transparency and accountability. This includes disclosing the progress made in implementing a risk management system and complying with corporate governance standards. Annual financial statements should contain details such as registration/licenses obtained from other financial regulators, credit ratings, penalties levied by regulators, overseas operations, and various exposure details.

Rotation of Partners of the Statutory Auditors’ Audit Firm

To ensure independence and unbiased auditing, HFCs must rotate the partner/s of the Chartered Accountant firm conducting the audit every three years. However, the same partner may be eligible for reappointment after a three-year interval if the HFC decides. Appropriate terms should be incorporated in the letter of appointment to ensure compliance with this requirement.

Framing of Internal Guidelines

All HFCs should frame their internal guidelines on corporate governance, enhancing the scope of the guidelines while maintaining their spirit. These guidelines should be approved by the Board of Directors and published on the company’s website for stakeholders’ reference.