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Wanted: specialised housing finance regulator
Housing finance needs separate and focused regulation with a sharp developmental agenda. A one-size-fits-all approach to financial sector regulation will lead to sub-optimal outcomes.
A NOTABLE FEATURE about economic policy reforms in India in the past two decades is that financial sector reform have significantly lagged behind reforms in industrial, trade and tax policies. One would suppose that in today’s complex, modern economic environment, our financial sector regulators would be working with something more contemporary than colonial-era legislation. But, unfortunately, that is not the case. The Reserve Bank of India (RBI), the fulcrum of the financial system, still works with a vintage 1934 Act designed for a colonial economy. And, if the RBI’s “over-arching” attitude to financial sector regulation is any indication, it seems least interested in any fundamental change.

A case in point is the recent attempt to bring specialised housing finance companies under the RBI’s regulatory ambit, bypassing the sector regulator, the National Housing Bank (NHB).  

At a broad level, it is understood that the NHB Act needs to be amended, but not for the reasons adduced. Any amendment needs to take cognizance of the unique nature of the housing finance business which does long-term financing of a durable, real asset. Such uniqueness in the very nature of the business requires that the activity be regulated by a specialised agency viz. the National Housing Bank which can focus full time on policy making for the housing finance sector and promote the development of financial products suited to the nature of that business. 

Operational difficulties

Even though the RBI is the banking regulator, it does not automatically follow that it is the appropriate authority to regulate all types of financial intermediaries carrying on the borrowing / lending activity. HFCs conduct a highly specialised activity. There is a need for a specialised agency which can work out long-term and structural solutions in the housing finance sphere – for instance, developing a long-term funding product for HFCs and in promoting the sound development of a securitisation market. It is not clear if the RBI is ideally placed to execute such responsibilities. 

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