Calcutta, July 11: The finance ministry has rejected the National Housing Bank's (NHB) proposal to amend the NHB Act so that it can effectively regulate housing finance companies (HFCs).

The apex bank for housing finance companies is now weighing the alternative of directing firms to obtain a fresh registration for remaining in business, on the lines of non-banking finance companies.

"Now that non-banking finance companies keen on continuing business have registered themselves with the RBI, there is no reason why there should be a different set of rules for HFCs. Since the RBI registration did not apply to HFCs, we are trying to cover up the vacuum by initiating similar measures for housing finance companies," a NHB official said.

The apex housing bank NHB had urged the ministry to introduce an amended act so that it could administer firms with a firm hand and ensure that funds mopped up are deployed in the earmarked sector.

Housing companies enjoy an advantage over NBFCs when it comes to raising funds since they are allowed to mop up 15 times their net-owned funds (NoF) against only 10 times for NBFCs.

Hence, it was felt necessary to ensure that the funds raised were not siphoned off to the non-housing businesses in quest for earn higher returns.

Although there are over 450 HFCs in India, only 25 are approved by the NHB for refinance. These control as high as 85 per cent of the total business, and the apex bank is often clueless about the activities of small entities which do not obtain refinance facilities from it.

The amendment was thus mooted to check the unregulated growth of housing finance companies. "HFCs are just another type of non-banking finance companies. If registration is not made mandatory, un-registered NBFCs may convert themselves into housing firms and continue in business without adhering to the RBI prescribed norms," the NHB official pointed out.

The fresh registration norms are likely to be in line with those prescribed under the RBI (Amendment) Act of 1997 for finance companies. The NoF for HFCs would be pegged at around Rs 25 lakh. HFCs will have to maintain a minimum capital adequacy ratio of 8 per cent.

"The ratio is reasonable and there is no reason why it should be raised," the NHB source added.

Welcoming the move to enforce mandatory registration for HFCs, SBI Home Finance managing director M L Chandra said: "Such measures will go a long way to instill public confidence in housing finance companies."

The apex bank is working on a revamped Home Loan Account scheme, which would enable scheduled commercial banks, co-operative banks and land development banks, besides housing finance companies, to act as collection agents and thus broadbase the ambit of the scheme. The revised one is expected to be finalised next month.

Meanwhile, the NHB has also devised a new formula to work out long-term housing loan targets to improve the flow of funds into the sector and curb the unfair practice to restrict housing loans despite having a large fund base.

The changes have been brought about to plug the systemic loophole as housing loan portfolios of HFCs will now be based on their overall capital employed.