Why Did RBI Impose Penalties on Godrej Housing, HUDCO and Aadhar Housing Finance?

Summary:

The Reserve Bank of India (RBI) has imposed monetary penalties on Godrej Housing Finance, Aadhar Housing Finance, and HUDCO for failing to comply with its housing finance directives. Citing violations related to improper loan valuations, premature interest charges, and inadequate risk management, the RBI’s actions were based on inspections conducted under the National Housing Bank Act. This move highlights the importance of strict adherence to regulatory guidelines in the housing finance sector.

Let us have a look at some of the reasons for the same:

Monetary Penalties for Non-Compliance

The Reserve Bank of India (RBI) has imposed penalties on three Non-Banking Financial Companies (NBFCs) for violating RBI directives related to housing finance operations.

Companies Penalized

• Godrej Housing Finance Limited: Penalty of Rs 5 lakh.
• Aadhar Housing Finance Limited: Penalty of Rs 5 lakh.
• Housing and Urban Development Corporation Limited (HUDCO): Penalty of Rs 3.5 lakh.

Legal Basis for Penalties

These penalties were imposed under the powers granted by Section 52A of the National Housing Bank (NHB) Act, 1987. The penalties were based on NHB’s statutory inspections of the companies' financial positions as of March 31, 2022.

Supervisory Findings of Non-Compliance

RBI identified non-compliance with its guidelines during inspections and issued a notice to the companies. The notice asked the companies to explain why penalties should not be imposed for failing to adhere to RBI directives.

Specific Violations by Each Company -

Godrej Housing Finance Limited:

Failed to obtain two independent valuation reports before sanctioning loans of Rs 75 lakh and above.

Aadhar Housing Finance Limited:

Charged interest on loans before actual disbursement or issuance of checks to borrowers, violating RBI's 'Fair Practices Code.'

HUDCO:

Failed to undertake risk categorization of customers, did not establish a review system for risk categories, and did not create a floating charge on its assets as required by Section 29B of the NHB Act to protect depositors.

Outcome After Submissions and Hearings

The companies were given the opportunity to submit replies, provide oral submissions during a personal hearing, and submit additional documents. After reviewing all responses, the RBI concluded that penalties were warranted for each company’s specific violations.