The National Housing Bank ( NHB) has directed housing finance companies to pay interest to borrowers on any advance payments not immediately adjusted against Equated Monthly Instalments (EMIs) and are parked in sundry or suspense accounts, two people familiar with the development told ET.
The interest must be paid at the same rate as that applied to the customers' home loan. The move aims to promote fair lending practices and prevent borrowers from bearing undue interest costs when their advance payments are not promptly applied.
"NHB is essentially saying that HFCs cannot earn by holding on to customers' advance EMIs," said the chief executive of a housing finance company. "This ensures borrowers aren't unfairly charged interest when they've already paid in advance."
The regulator has also advised HFCs to focus on improving borrower quality rather than relying on upfront collections as a safeguard against defaults. "Some housing finance firms were taking one or two EMIs in advance from economically weaker section (EWS) and low-income group (LIG) borrowers to cushion their books against potential EMI bounces," said a senior executive at another HFC. "NHB has made it clear that either disburse a lower loan amount or be prepared to pay interest on the advance EMI collected."
The NHB directive aligns with the Reserve Bank of India's broader push for transparent and fair lending practices. Last year in April, the RBI instructed all lenders to begin charging interest only from the actual date of loan disbursement, not from the date of loan agreement execution, after inspections revealed discrepancies.
In several cases, lenders were found charging interest for the entire month, even if the loan was disbursed partway through, resulting in higher borrower costs. The RBI's intervention sought to ensure borrowers are charged only for the actual duration their loans are outstanding.
NHB, which regulates and supervises housing finance companies, has been steadily tightening oversight of the sector. In December 2024, it mandated that all HFCs report non-performing asset (NPA) data on the first of each month, after discovering delays in how some lenders recorded collections from previous months.
In March, the regulator pulled up HFCs for mis-selling insurance policies bundled with home loans, instructing them to immediately halt the sale of insurance products without clearly disclosing terms to borrowers. In May, NHB further tightened its rules for refinancing home loans in under-construction projects. It stated that refinance would only be available if less than half of the construction was completed at the time of the first disbursement, aiming to curb misuse of funds and reduce risk in early-stage projects.
The interest must be paid at the same rate as that applied to the customers' home loan. The move aims to promote fair lending practices and prevent borrowers from bearing undue interest costs when their advance payments are not promptly applied.
"NHB is essentially saying that HFCs cannot earn by holding on to customers' advance EMIs," said the chief executive of a housing finance company. "This ensures borrowers aren't unfairly charged interest when they've already paid in advance."
The regulator has also advised HFCs to focus on improving borrower quality rather than relying on upfront collections as a safeguard against defaults. "Some housing finance firms were taking one or two EMIs in advance from economically weaker section (EWS) and low-income group (LIG) borrowers to cushion their books against potential EMI bounces," said a senior executive at another HFC. "NHB has made it clear that either disburse a lower loan amount or be prepared to pay interest on the advance EMI collected."
The NHB directive aligns with the Reserve Bank of India's broader push for transparent and fair lending practices. Last year in April, the RBI instructed all lenders to begin charging interest only from the actual date of loan disbursement, not from the date of loan agreement execution, after inspections revealed discrepancies.
In several cases, lenders were found charging interest for the entire month, even if the loan was disbursed partway through, resulting in higher borrower costs. The RBI's intervention sought to ensure borrowers are charged only for the actual duration their loans are outstanding.
NHB, which regulates and supervises housing finance companies, has been steadily tightening oversight of the sector. In December 2024, it mandated that all HFCs report non-performing asset (NPA) data on the first of each month, after discovering delays in how some lenders recorded collections from previous months.
In March, the regulator pulled up HFCs for mis-selling insurance policies bundled with home loans, instructing them to immediately halt the sale of insurance products without clearly disclosing terms to borrowers. In May, NHB further tightened its rules for refinancing home loans in under-construction projects. It stated that refinance would only be available if less than half of the construction was completed at the time of the first disbursement, aiming to curb misuse of funds and reduce risk in early-stage projects.
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