The adoption of an early warning signal framework by housing finance companies will help standardise the fraud reporting processes while improving the communication between lenders, said senior officials.
The National Housing Bank (NHB) in a circular on April 26 had asked housing finance companies (HFCs) to adopt the framework to detect frauds and bad loans.
Anil Kaul, managing director (MD) at Tata Capital Housing Finance, said his company has adopted several monitoring practices and the latest directions by the NHB will bring improvement in the governance model.
These practices include an independent check of borrower’s identity from government websites and portals, analytics-based verification of information provided by automated analysis of bank statements, validation of GST returns or filed IT returns, and salary credits in banks.
According to the Reserve Bank of India’s report on trends and progress of banking in 2022, there were 95 HFCs with a total asset size of Rs 15.26 trillion. Of these, only 15 were deposit taking entities while six need prior permission from the regulator before accepting public deposits.
Non-government public limited companies dominate the segment, comprising 94.3% of total assets.
“Our industry continues to witness a robust growth, hence, such a regulatory guidance is always welcome because sometimes risk management tends to be taken for granted in positive market conditions. An EWS framework will bring structured and comprehensive set of tools and practices to ensure lower instances of frauds and misrepresentations for HFCs,” Kaul said.
According to the NHB guidelines, HFCs must report the implementation and progress of the EWS framework to the audit committee of the board and an escalation matrix for reporting breach, if any, will also have to be developed by the HFCs.
The mechanism needs to be operationalised by April 1, 2024, the notification said.
Some of the indicators that HFCs should monitor under the EWS framework include the disbursement of loans without meeting all pre-disbursement requirements, change in occupation of a borrower and an adverse development in sector where the borrower is employed.
“We do screening, we use technology to detect customer behaviour…in terms of new guidelines as I mentioned, we are already there but in terms of some cosmetic changes in terms of technology, there will be a small bend over there but in terms of process and control everything is in place,” Girish Kousgi, MD and chief executive officer (CEO) at PNB Housing Finance, told FE.
According to Shantanu Rege, MD and CEO of Mahindra Rural Housing Finance, currently information sharing between HFCs is minimal. While there are some closed user groups (CUGs), information sharing is largely limited through the regulator only.
“With a largely standardised framework being followed, we are also hoping that the new changes will motivate various institutions to share/exchange more information of fraudulent customers/events with each other,” Rege said.
Ravin Subramanian, MD and CEO at Shriram Housing Finance, told FE that there is a 25-member team at the HFC which conducts an extensive range of pre and post-disbursement checks to identify internal and external frauds. Some existing levers in place include hindsight checks, market networking, mystery shopping fraud awareness and training.
When asked whether the move would raise operational costs for the HFCs, the MD said there will not be any major impact. “We believe that the investment in strengthening the EWS framework are a long-term investment towards protecting the quality of the portfolio,” he said.
1) The NHB on April 26 asked HFCs to adopt an EWS framework for fraud detection
2) Major HFCs monitor risk and frauds through internal risk committees
3) The dcope of communication between HFCs, standardisation of fraud disclosures likely post-implementation of the circular