What changed
Paragraph 10(16) of the Master Directions is replaced with a detailed definition of Owned Fund. Quarterly profits can now be included, but only after a limited review/audit and after deducting 25% of the average dividend paid over the last three years. Right-of-Use (ROU) assets from tangible leases are no longer deducted from Owned Fund.
What it means for you
HFCs can now bolster their Owned Fund with quarterly profits, improving capital adequacy ratios if they meet audit and dividend adjustment conditions. The exclusion of ROU assets for tangible leases reduces capital erosion, easing compliance with net worth requirements. Banks lending to or investing in HFCs should reassess counterparty capital strength under the new formula.
What you must do
- Update internal capital computation models to include quarterly profits as per the new formula (EP_t = NP_t - 0.25*D*t).
- Ensure quarterly financial statements undergo limited review/audit by statutory auditors to qualify for profit inclusion.
- Review and adjust Owned Fund calculations by removing ROU assets for tangible leases from deductions.
- Communicate the revised Owned Fund definition to risk and compliance teams for accurate regulatory reporting.
Who it affects
All Housing Finance Companies (HFCs), Statutory auditors of HFCs, Banks with exposure to HFCs (lending or investment)
Can HFCs include quarterly profits in Owned Fund without audit?
No, inclusion requires that quarterly financial statements undergo a limited review or audit by the statutory auditors.
How is the dividend adjustment calculated for quarterly profit inclusion?
Eligible profit for quarter 't' is net profit up to that quarter minus 0.25 times the average dividend paid over the last three financial years.
Are ROU assets for intangible leases also excluded from Owned Fund deduction?
No, the exclusion applies only to ROU assets where the underlying leased asset is tangible.