The National Housing Bank (NHB) was established in July 1988 as the apex bank in the field of housing finance by the National Housing Bank Act, 1987. It is the primary agency responsible for promoting housing finance institutions at the regional and local levels, as well as providing financial and other assistance to such institutions.

What is National Housing Bank?

• National Housing Bank is a government-owned corporation. The government took over the NHB from the RBI in 2019 after purchasing the entire stake for Rs. 1,450 crores.
  • The move is in response to the recommendation of the Narasimham-II committee report from October 2001.
• NHB raises funds via debt instruments such as bonds, debentures, and borrowings.
• Its bonds, which are guaranteed by the Government of India, are eligible securities for commercial banks to use in order to meet the statutory liquidity requirements under the Banking Regulation Act.
• Furthermore, it receives external assistance from international organisations such as USAID and OECF Japan.
• It accepts deposits through commercial banks' Home Loan Accounts.
• The National Housing Bank refinances Housing Finance Companies, which are located throughout the country and account for the majority of the market, followed by commercial banks, co-operative banks, and Land Development Banks.
• National Housing Bank offers refinancing to housing finance companies at varying rates based on loan size.

National Housing Bank – Historical perspective

• The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985-1990) identified the lack of long-term finance to individual households on a significant scale as a major impediment to housing sector progress and recommended the establishment of a national level institution.
• The Committee of Secretaries considered the recommendation and formed the High-Level Group, chaired by Dr C. Rangarajan, the then-Deputy Governor of the Reserve Bank of India, to examine the proposal and recommend the establishment of the National Housing Bank as an autonomous housing finance institution.
• The High-Level Group's recommendations were accepted by the Government of India.
• On February 28, 1987, the Prime Minister of India announced the decision to establish the National Housing Bank (NHB) as an apex level institution for housing finance while presenting the Union Budget for 1987-88.
• Following that, the National Housing Bank Bill, which provided the legislative framework for the establishment of NHB, was passed by Parliament in the winter session of 1987 and became an Act of Parliament with the assent of the President of India on December 23, 1987.
• The National Housing Policy of 1988 called for the establishment of the NHB as the apex housing institution.
• NHB was established on July 9, 1988, under the National Housing Bank Act of 1987.
• The entire paid-up capital was contributed by the Reserve Bank of India.
• The general supervision, direction, and management of NHB's affairs and business are vested in a Board of Directors under the Act.
• NHB's headquarters are in New Delhi.

National Housing Bank – Objectives

• To promote a sound, healthy, viable, and cost-effective housing finance system capable of serving all segments of the population, as well as to integrate the housing finance system with the overall financial system.
• To encourage the development of a network of dedicated housing finance institutions to adequately serve various regions and income groups.
• To increase resources for the sector and direct them toward housing.
• To make mortgages more affordable.
• To monitor the activities of housing finance companies as per the supervisory powers it derives from the Act.
• To encourage the expansion of the supply of buildable land as well as building materials for housing, as well as to upgrade the country's housing stock.
• Encourage government agencies to become facilitators and suppliers of serviced land for housing.

Eligibility Criteria for obtaining refinance from NHB

• The housing finance company must have a minimum share capital of Rs. 3 crore and a promoter contribution of at least 25% of the total capital.
• It must be registered as a publiclimited company. Long-term financing for house construction/purchase for residential purposes must account for at least 75% of loans.
• It must not be a subsidiary of any construction firm.
• The top management of the Housing Finance Company should not hold a similar position in the promoters' Construction Company.

National Housing Bank – Role & Importance

• Ensuring adequate financing for housing infrastructure development, as well as a continuous flow of liquidity to various housing finance institutes for timely financing to all income segments.
• Ensure proper regulation and oversight of all housing finance companies operating throughout the country.
• The NHB is also in charge of auditing such companies, ensuring their compliance with the relevant guidelines, and ensuring that the organisations make credit available at affordable rates in order to provide housing facilities for all.
• The NHB was also created with the goal of increasing the number of housing units in the country.
  • As a result, the National Housing Bank plays an important role in making land available for housing development by acting as a facilitator to enable companies in the housing sector to raise funds and smooth the entire function, resulting in increased efficiency and productivity.

National Housing Bank – Functions

• It is primarily in charge of registering and supervising all Housing Finance Companies (HFCs), as well as maintaining surveillance through on-site and off-site mechanisms and coordinating with other regulators.
• Supervision and control of housing companies operating in India under the authority granted by the National Housing Bank Act.
• Raising funds on a large scale and refinancing for housing finance companies, cooperative banks, and other housing agencies for onward lending to individuals and housing infrastructure companies.
• Regulating and ensuring that housing finance companies meet all regulatory capital requirements outlined in the BASEL guidelines.
• Assuring that they have a proper risk management system in place, as well as good governance practises, and so on.

National Housing Bank – RESIDEX

The NHB RESIDEX is India's first official housing price index, created by the National Housing Bank (NHB) in response to Ministry of Finance, Government of India directives. A few key points regarding NHB RESIDEX are:

• The NHB RESIDEX was developed with the assistance of a Technical Advisory Committee (TAC) comprised of housing stakeholders.
• Since its inception in July 2007, the NHB RESIDEX has been updated on a regular basis until March 2015, with the year 2007 serving as the baseline. During this time, the NHB RESIDEX gradually expanded to cover 26 cities across the country.
• The NHB RESIDEX was initially calculated using market data. However, beginning in 2010, it was based on valuation data obtained from housing finance companies (HFCs) and banks.
• The NHB conducted a review of the processes used to compute the index, as well as the base year, in order to make the RESIDEX more current and in line with the current macroeconomic scenario.
• Following that, a redesigned NHB RESIDEX with broader geographical coverage and a broader scope was released. It was calculated using the fiscal year 2012-13 as the base year and is updated tillMarch 2018.
• With effect from April 2018, a new series of the NHB RESIDEX has been published, with the fiscal year 2017-18 as the new base year, and is updated up to the current quarter.

Conclusion

• The National Housing Bank (NHB) is a self-governing institute primarily concerned with housing development.
• It is also in charge of promoting housing finance institutions for both national and regional housing infrastructure development.
• Furthermore, the NHB meets the financing needs of these institutions by either fundraising for onward refinancing or providing a guarantee to such institutions in order for them to raise funds.

FAQs

MCQs

1. What is the primary objective of the National Housing Bank (NHB)?

A) To regulate commercial banks
B) To promote a viable housing finance system
C) To develop industrial infrastructure
D) To manage foreign exchange reserves

2. Which of the following is an initiative by NHB to develop mid-sized cities into regional hubs?

A) Smart City Mission
B) Pradhan Mantri Awas Yojana
C) Urban Infrastructure Development Fund (UIDF)
D) AMRUT

3. What type of financial assistance does NHB provide to housing finance institutions?

A) Equity investment
B) Refinance support
C) Venture capital
D) Subsidies for builders

4. Which function of NHB involves regulating and supervising Housing Finance Companies (HFCs)?

A) Promotion and development
B) Regulation and supervision
C) Direct financing
D) Research and publication

5. Which of the following measures has NHB implemented to strengthen the housing finance sector?

A) Guidelines on asset quality and capital adequacy
B) Merger of commercial banks
C) Introduction of a single housing index
D) Complete deregulation of HFCs

GS Mains Questions and Model Answers

Q1: Evaluate the impact of NHB's refinance operations on the housing finance market in India.

Answer: NHB’s refinance operations have significantly impacted the housing finance market in India by providing liquidity support to various primary lending institutions, including HFCs and commercial banks. This has enabled these institutions to extend more home loans, thereby improving access to housing finance for a wider population. The availability of refinance has also promoted competition among lenders, fostering better terms for borrowers. NHB’s efforts have strengthened the housing finance market, contributing to the growth of the real estate sector and promoting home ownership across different income groups.

Q2: Discuss the challenges NHB faces in regulating Housing Finance Companies (HFCs) and the measures taken to address them.

Answer: NHB faces several challenges in regulating HFCs, such as maintaining asset quality, ensuring capital adequacy, and enforcing corporate governance. To address these issues, NHB has implemented a comprehensive regulatory framework that includes stringent guidelines on capital requirements, asset classification, and risk management practices. It conducts regular inspections and audits of HFCs to monitor their compliance with these standards. Additionally, NHB collaborates with the Reserve Bank of India and other financial bodies to align its regulatory practices with broader financial stability measures. These efforts ensure that HFCs operate in a safe and sound manner, protecting depositors and borrowers alike.

Q3: Analyze the role of NHB in promoting sustainable urban development through initiatives like the Urban Infrastructure Development Fund (UIDF).

Answer: NHB’s role in promoting sustainable urban development is exemplified by its Urban Infrastructure Development Fund (UIDF). This initiative focuses on mid-sized cities with populations between 50,000 to 9,99,999, aiming to develop them into regional economic hubs. By channeling resources towards infrastructure development, UIDF promotes balanced urban growth, reduces the pressure on major cities, and fosters economic opportunities in smaller urban centers. This approach aligns with sustainable development goals by supporting inclusive growth and reducing regional disparities. NHB’s proactive measures in this area demonstrate its commitment to integrating housing finance with broader urban development strategies.

Previous Year Questions on NHB

1. UPSC CSE Prelims 2022:

Question: What is the primary function of the National Housing Bank?

A) To manage foreign exchange reserves
B) To promote housing finance and regulate HFCs
C) To oversee public sector banks
D) To manage inflation and monetary policy

Answer: (B)

Explanation: The primary function of NHB is to promote housing finance and regulate Housing Finance Companies (HFCs) to ensure a robust housing finance system in India.

2. UPSC CSE Mains 2021 (GS Paper 3):

Question: "Critically examine the role of the National Housing Bank in the development of the housing finance sector in India. Discuss its contributions and challenges."

Answer: The National Housing Bank (NHB) has played a pivotal role in the development of the housing finance sector in India by providing refinance support, regulating HFCs, and promoting housing finance institutions. Its contributions include enhancing liquidity, ensuring compliance with regulatory standards, and fostering a competitive lending environment. However, NHB faces challenges such as maintaining asset quality, addressing capital adequacy issues, and enforcing corporate governance. The introduction of initiatives like UIDF and RMBS shows NHB’s adaptability in meeting new challenges and promoting growth. Despite these efforts, continued vigilance and collaboration with other financial regulators are essential to address emerging risks in the housing finance sector.