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Big scandal in housing finance: Why is the Centre mum on the diversion of funds by HFCs?
We may call our mother land as "Punya Bhoomi" (holy land), but its image was corroded by many murky scams. A study by a Berlin-based NGO pegs India as the most corrupt nation in the Asia-Pacific region.

India has been home to several scams, resulting to losses amounting to lakhs of crore rupees to the economy. Apart from the known dacoits, some institutes disguise as "Housing finance companies" (HFCs) clandestinely robbing our country since many years. Many officials, including executives of LIC Housing Finance, were arrested few years ago in bribery and funds diversion scandal. Also, there were preliminary enquiries into loans given by these HFCs  to some stocks and real estate  companies, the  sectors the RBI  has flagged as 'sensitive'.

Total urban housing shortage in India is estimated at 10 million units. To mitigate the housing problems in urban areas HFCs were encouraged by the government for financing construction residential houses by individual citizens especially in the Low and Medium income groups. Any Housing Finance Company (public / private) has to secure a license from National Housing Bank under NHB Act before it collects public deposits and issue loans to individuals for residential constructions.

The RBI categorically prohibits companies from taking public deposits and to give loans without obtaining a license from RBI as a bank or NBFC. But many of the Housing Finance Companies have deliberately violated various sections of NHB Act and have taken public deposits to the tune of  tens of  thousands of crores and diverted them away  from  Individual  Housing  Residential construction.

RBI had directed some HFCs to stop taking public deposits and to return deposits if they continues to violate its mandate as per NHB Act. Some HFCs in spite of RBI directions did not stop taking deposits and continue lending business beyond its mandate as per NHB Act. The said NHB Act mandate for Housing Finance Companies is to lend only to borrowers who are individuals for Residential House constructions only.

But Private auditors of some Housing Finance Companies have deliberately misled the Government, SEBI, public depositors and investors, by suppressing the fact of diversion of thousands of crores of  public funds for activities for which the HFC is not licensed under NHB Act.

Some HFC without having the mandate to lend to any other borrower other than to individuals for residential house construction have been misleading government ministries by entering into various MOU's to do certain lending activities to various other agencies without license. Even the said Ministries do not have powers to allow HFC to take public deposits and do lending activity beyond the mandate given to HFC under NHB Act.

HFC's follow only NHB guidelines and norms for all its activities of taking public deposits and lending business. Said NHB Guidelines are issued by NHB under NHB Act to Housing financial Companies which are only applicable for residential house construction loans.  As HFC are not regulated by RBI and they do not follow RBI guidelines, HFC are thus following wrong guidelines for its non housing loans. Such actions of HFC in following NHB housing loan guidelines for non-housing loans are illegal and not as per law.

A high powered committee established by government  on certain HFC's has in its report stated on page 30, point no 5 that Housing Finance Companies can lend only to individuals for house construction and if any Housing Finance Company wishes to do other then Housing lending then it should apply to RBI for a license as a Bank or NBFC. It is clear that some of these HFCs have deliberately not applied to RBI for NBFC license because the said HFCs do not want to be regulated by RBI. The HFCs are rotating public deposits of lakhs of crores of rupees through lending activity as NBFC without actually obtaining license from RBI as NBFC.

The National Housing Bank Act, 1987 (the NHB Act) was enacted in December,1987 to establish the National Housing Bank (NHB) to operate as a principal agency to license and regulate housing finance institutions both at local and regional levels and to provide financial and other support to such institutions. Such Housing Financial Institutions licensed by NHB under NHB Act are permitted to take public deposits from public and other financial entities thru Bonds etc. The following Section 29A defines the requirement to obtain Certificate of Registration to accept public deposits by Housing Finance Institutions for Housing Finance Sector:

Sec 29A (1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no housing finance institution which is a company shall commence or carry on the business of a housing finance institution without -(a) obtaining a certificate of registration issued under this Chapter;

And as per the said NHB Act definition of "Borrower" any Housing Finance Company licensed under NHB Act can only do lending activity for construction of residential houses by individuals.

The following NHB Act Sec 2(d) 36(b), 36(c), 36(d) gives definition pertinent to the Housing Finance Institutions which are self explanatory:

2(d) "housing finance institution" includes every institution, whether incorporated or not, which primarily transacts or has as 2[one of its principal objects], the transacting of the business of providing finance for housing, whether directly or indirectly;

36(b) "approved institution" means

 (i) a housing finance institution which has been granted a certificate of registration under sub-section (5) of section 29A;

(ii)  (ii) a scheduled bank;

(iii) National Housing Bank acting as trustee or otherwise in a transaction of securitisation of housing mortgages undertaken by the National Housing Bank;

(iv) Such other institutions as the Central Government may, on the recommendation of the National Housing Bank, by notification, specify;

Sec 36C (c) "assistance" means any direct or indirect financial assistance granted, by an approved institution during the course of any housing finance activity undertaken by it;

Sec 36 C (d) "borrower" means any person to whom any assistance has been given by an approved institution for the purposes of purchase, construction, repairs, extension or renovation of a residential house;

Some of the Housing Finance Companies have deliberately ignored the mandate of the government in establishing said Housing Finance Institution to help poor and medium income citizens in the country to build residential houses. 

Whereas NHB inspite of  knowledge of  diversion of  housing funds has not initiated any criminal or other penal actions permitted by NHBs under NHB Act against Housing Finance Companies. The NHB has miserably failed in its supervisory and regulatory duty by not preventing deliberate diversion of public deposits of over a lakh crores rupees. 

Only a Central Bureau of Investigation (CBI) probe into the lending activities of Housing Finance Companies will unearth the illegal diversion of  lakhs of crores of  Public Deposits meant for individual residential house construction to other activities for which the said HFCs do not bear valid licenses as NBFCs.

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