On November 20, 2019, the Reserve Bank of India superseded the board of Dewan Housing Finance Corporation Limited. The order, issued under Section 45-IE of the RBI Act, cited "governance concerns and defaults by DHFL in meeting various payment obligations." DHFL — once India's third-largest housing finance company — had been hollowed out by its own promoters, and the regulator that was supposed to be watching was the National Housing Bank, not the RBI.
"The Reserve Bank has today superseded the Board of Directors of Dewan Housing Finance Corporation Limited (DHFL) owing to governance concerns and defaults by DHFL in meeting various payment obligations." — RBI Press Release on DHFL Supersession, November 2019
Three months earlier, on August 9, 2019, the Central Government had transferred regulatory authority over all housing finance companies from NHB to the RBI. The DHFL crisis was the reason. NHB had supervised HFCs for three decades, but it lacked the enforcement powers and the independence to discipline a systemically important lender. The transfer happened through the Finance (No.2) Act, 2019, which amended the National Housing Bank Act, 1987 to confer regulatory powers over HFCs on the Reserve Bank.
"HFCs will henceforth be treated as one of the categories of Non-Banking Financial Companies (NBFCs) for regulatory purposes." — Transfer of Regulation of HFCs to RBI, August 2019
Why did NHB supervision fail?
NHB was established in 1988 as a wholly owned subsidiary of the RBI, tasked with promoting and regulating housing finance institutions. The problem was structural: NHB was simultaneously a promoter and a regulator — it refinanced HFCs, developed housing finance markets, and supervised the very institutions it was funding. When DHFL began diverting funds through shell companies in 2016-2018, NHB's supervisory apparatus did not catch it in time.
The IL&FS collapse of September 2018 had already demonstrated that India's NBFC sector contained entities large enough to threaten financial stability but regulated too lightly to prevent failure. DHFL confirmed the pattern. With over Rs 1 lakh crore in assets, its failure rippled through the mutual fund industry, the bond market, and the banking system — exactly the contagion a prudential regulator exists to prevent. The government's response was to transfer HFC regulation to the institution that had the supervisory bandwidth and the legal powers to intervene decisively.
How did HFCs become a category of NBFC?
The October 2020 Review of Regulatory Framework for HFCs RBI/2020-21/60 was the RBI's first comprehensive rewrite after the transfer, superseding NHB regulations and bringing HFCs under the RBI's prudential framework. The reason for treating HFCs as a species of NBFC was regulatory convergence — entities performing similar credit intermediation should face similar rules, because they pose similar risks.
The February 2021 Master Direction for Housing Finance Companies RBI/2020-21/73 (since withdrawn) consolidated the framework into a single document, amended over twenty times since, most recently in July 2025. When the RBI introduced Scale Based Regulation in October 2021 RBI/2021-22/112 (since withdrawn), HFCs were placed in the Middle Layer by default — the reason being that housing lending involves long-tenor assets funded by shorter-tenor liabilities, creating liquidity risk even at moderate scale. Several large HFCs were subsequently designated as Upper Layer NBFCs, subjecting them to bank-equivalent governance and capital requirements.
What do LTV caps actually protect against?
Loan-to-Value ratios are housing finance regulation's most direct tool for controlling default risk. If a borrower puts down 10% and the property drops 15% in value, the borrower is underwater and the incentive to default spikes. The 2008 US subprime crisis was, at its core, a story of LTV ratios at or above 100%.
The RBI's Master Circular on Housing Finance RBI/2014-15/68 (since withdrawn) prescribes a tiered LTV structure in place since June 2013:
"The LTV ratio in respect of housing loans should not exceed 80 per cent. However, for small value housing loans i.e. housing loans up to 20 lakh (which get categorized as priority sector advances), the LTV ratio should not exceed 90 per cent." — Master Circular on Housing Finance, July 2014 (since withdrawn)
For loans up to Rs 20 lakh, the maximum LTV is 90%. Between Rs 20 lakh and Rs 75 lakh, it drops to 80%. Above Rs 75 lakh, it falls to 75%, requiring a 25% down payment. The graduated structure exists because the social cost of denying affordable housing finance exceeds the incremental default risk, while larger loans to wealthier borrowers warrant stricter requirements. Stamp duty and registration charges are excluded from the property valuation — the reason being these costs are irrecoverable on repossession, so including them would dilute the LTV cap.
Why do risk weights on housing loans keep changing?
Risk weights determine how much capital a bank holds against a loan. Lower risk weights mean cheaper lending; higher risk weights mean more expensive lending. The RBI uses this as a macroprudential tool — tightening when housing credit grows too fast, loosening when it needs stimulation.
In October 2020, as COVID-19 threatened a credit freeze, the RBI rationalised risk weights on individual housing loans RBI/2020-21/56 (since withdrawn) as a countercyclical measure: 35% for LTV up to 80%, and 50% for LTV between 80-90%. Housing loan growth accelerated through 2021 and 2022 as a result.
Then the cycle turned. By November 2023, the RBI issued regulatory measures on consumer credit RBI/2023-24/85 (since withdrawn), raising risk weights on consumer credit by 25 percentage points — but explicitly excluded housing loans. The reason was that housing credit was growing at sustainable rates and the collateralised nature of home loans posed lower systemic risk than unsecured personal lending. That exclusion was itself a policy signal: the RBI differentiates between credit categories based on underlying collateral quality.
How does housing qualify as priority sector lending?
The RBI's Master Directions on Priority Sector Lending RBI/2016-17/81 set specific thresholds for housing loans. Individual housing loans up to Rs 35 lakh in metropolitan centres qualify, provided the dwelling unit cost does not exceed Rs 45 lakh. In non-metropolitan areas, the loan limit is Rs 25 lakh with a property cost cap of Rs 30 lakh. The January 2026 revised PSL Master Directions (Master Directions - Reserve Bank of India (Priorit) preserved these thresholds.
The reason for these caps is to direct credit toward affordable housing rather than luxury apartments. Without PSL classification, banks would rationally prefer lending Rs 2 crore for a premium apartment over Rs 25 lakh for an affordable unit, because the larger loan generates more fee income with similar processing costs. The mandate forces the allocation. Banks that fall short deposit shortfalls with NABARD — the same mechanism that drives their priority sector targets for agriculture and MSMEs.
The Pradhan Mantri Awas Yojana (PMAY) operates through this infrastructure. PMAY's Credit Linked Subsidy Scheme provides interest subsidies on housing loans to EWS, LIG, and MIG borrowers, with banks and HFCs as delivery channels. The January 2014 Credit Risk Guarantee Fund Trust for Low Income Housing RBI/2013-14/425 (since withdrawn) allowed NBFC-MFIs to assign zero risk weight to the guaranteed portion of low-income housing loans — reducing the capital cost of lending to the poorest borrowers.
What does enforcement look like after the transfer?
The RBI has imposed monetary penalties on multiple HFCs for non-compliance. In October 2022, LIC Housing Finance was penalised Rs 5 lakh for failing to create a floating charge in favour of depositors. In March 2023, HDFC Limited received an identical penalty for failing to transfer matured deposits. In September 2023, Nido Home Finance was penalised Rs 1.55 lakh for an unapproved shareholding change. These penalties are small in absolute terms — their significance is the signal that the RBI is actively supervising HFCs, which was not routine under NHB.
The July 2024 Master Directions on Fraud Risk Management in NBFCs including HFCs (Master Directions on Fraud Risk Management in Non-) extended the RBI's fraud reporting framework to housing finance companies — a direct response to the DHFL episode, where fraudulent transactions went undetected for years. During the COVID-19 liquidity crisis, the Special Liquidity Scheme for NBFCs/HFCs RBI/2020-21/01 (since withdrawn) kept housing finance companies liquid when wholesale funding markets froze, with eligibility requiring minimum CRAR, low NPAs, and investment-grade ratings.
What remains to change?
The 2019 transfer consolidated prudential supervision of all credit intermediaries — banks, NBFCs, and HFCs — under a single regulator. The DHFL crisis demonstrated that a specialised sectoral regulator with a dual promotional-supervisory mandate could not adequately supervise systemically important institutions.
Housing finance remains the fastest-growing segment of Indian retail credit. The regulatory challenges ahead include managing concentration in a few large HFCs now subject to Upper Layer norms, ensuring PSL thresholds continue directing credit toward affordable housing, and calibrating risk weights to prevent asset bubbles without choking credit flow to a sector where India faces a genuine shortage of tens of millions of units. The framework is in place. Whether it prevents the next DHFL depends on whether supervision matches ambition.
Last updated: April 2026