RBI Heads for a Scrap with Govt on Relief to Housing Finance Cos

Central bank refuses to give priority lending tag to refinancing of HFC loans by banks

The Reserve Bank of India and the government may be on a collision course yet again, this time on the treatment of banks' refinancing of specialist mortgage lenders as priority sector lending. 
In the latest set of priority sector rules issued last week, the central bank has ignored the indirect priority sector lending clause for refinancing of housing finance companies' loans by banks, reversing its own circular three weeks ago. 
While the finance ministry had sought to provide some relief to specialised housing finance companies for bridging gaps in low-cost housing, the banking regulator seems to have done away with it in line with its series of tightening norms against bank lending to finance companies. "It is a direct challenge by RBI to Parliament authority, which increased the ceiling from . 5 lakh to . 10 lakh," said R Nambirajan, managing director of DHFL Vysya Housing Finance, a lender mostly active in South India. "This is a great blow to housing finance players." 
The ministry wanted banks to consider their refinance facility to HFCs as indirect priority sector lending, subject to a ceiling of . 10 lakh loan per dwelling unit, to encourage them to lend more to low-income groups to promote affordable housing. RBI had raised the limit to . 10 lakh by issuing a master circular on July 1, but revised it within three weeks by superseding the circular. This means, RBI will not give priority lending tag to banks' refinancing of HFC loans. 
HFCs, especially the smaller ones which don't have easy access to lowcost funds, make the most of banks' refinance facility at 10-11% rate a year. The proposal to double the indirect priority sector lending limit to . 10 lakh was announced in the budget this year. 
"We will follow the fresh RBI guidelines as it's the right authority to decide on classification of loans," said a chairman of a public sector bank on condition of anonymity.

CHANGING TACK: D Subbarao