HFC provisioning norms: asset classes and rates (2025)

What are the HFC provisioning rates by asset class?

Paragraph 48 of the HFC Directions, 2025 sets the provisioning rates below. The standard asset rows do not apply to HFCs in the Upper Layer.

The secured part of a doubtful asset is the estimated realisable value of the outstanding, and only security with valid recourse for the HFC counts. Paragraph 48 requires that value to be estimated on a realistic basis.

How are HFC assets classified?

Paragraph 29 of the HFC Directions, 2025 sets four asset classes: standard, sub-standard, doubtful and loss. The classification weighs well-defined credit weaknesses and how far recovery depends on collateral.

The general tests for non-performing asset (NPA), sub-standard and doubtful status are cross-referred, not printed in the HFC Directions. Paragraphs 35, 32 and 33 point to paragraphs 51, 52 and 53 of RBI’s NBFC Income Recognition, Asset Classification and Provisioning Directions, 2025. Paragraph 5 applies those NBFC Directions to HFCs only where they do not contradict the HFC Directions.

The crop season test in the paragraph 35 proviso is printed in the HFC Directions themselves. A term loan to an agriculturist, or to a person whose income depends on the harvest, is an NPA in either of these cases:

• The instalment of principal or interest stays unpaid for two crop seasons beyond the due date, where income depends on short duration crops.
• The instalment stays unpaid for one crop season beyond the due date, where income depends on a long duration crop.

What are the SMA buckets for HFC loans?

Special mention accounts (SMA) are how an HFC recognises incipient stress, immediately on default, under paragraphs 37 and 38 of the HFC Directions, 2025. The buckets cover all loans, including retail, whatever the exposure size. Agricultural advances under crop season norms are exempt.

Which extra loss asset triggers apply to HFCs?

Paragraph 34 of the HFC Directions, 2025 adds loss triggers on top of the cross-referred definition in RBI’s NBFC Income Recognition, Asset Classification and Provisioning Directions, 2025. An HFC also treats these as loss assets:

• An asset identified as a loss asset by NHB during inspection, to the extent the HFC has not written it off.
• An asset under potential threat of non-recoverability because an insurance claim was denied or settled in part.
• An asset under the same threat because the debt became time barred under the Limitation Act, 1963.
• An asset under the same threat because of inchoate or defective documentation.

The HFC’s right to file suit does not stop the Reserve Bank, NHB or the auditors from treating the asset, or part of it, as a loss asset for these reasons.

How does loan size and LTV affect HFC provisioning and risk weight?

Loan size and loan to value (LTV) do not set the paragraph 48 standard provisioning rate for an HFC, because those rows are set by loan type. Loan size sets the paragraph 58 LTV cap. Loan size and LTV together set the paragraph 22 risk weight, the percentage applied to an asset to arrive at its risk adjusted value.

Restructured housing loans carry an additional risk weight of 25% on top of the risk weight above. Loans sanctioned before 01-08-2017 in the higher loan size bands have separate rows in paragraph 22.

Paragraph 58 computes LTV as total outstanding (principal, accrued interest and other charges, without netting) divided by the realisable value of the mortgaged residential property.

Which structuring choices move a loan between HFC provisioning rows?

Three structuring choices can move a standard HFC loan between paragraph 48 provisioning rows:

• Teaser pricing. Lower rates in the first few years followed by a reset to higher rates bring the 2% rate. Provisioning moves to the applicable rate one year after the rates reset higher, if the account stays standard. Loans under the Rural Housing Funds and Urban Housing Funds Schemes are not treated as teaser loans.
• Third dwelling unit. Loans for the third dwelling unit onwards to an individual are treated as CRE exposure.
• End use. Loans for furnishing, and loans against property for purposes outside housing, are non-housing under paragraph 10(8). Unless they qualify as CRE, read them into the 0.4% row.

How does the CRGFTLIH guarantee affect HFC provisioning?

The CRGFTLIH guarantee does not move a loan between provisioning rows. Under the paragraph 48 proviso, once a housing loan guaranteed by CRGFTLIH becomes non-performing, no provision is needed on the guaranteed portion. The amount outstanding above the guaranteed portion is provided for under the usual requirements.

The web text of this proviso reads unevenly and does not expand the acronym in that paragraph, so check the wording against the PDF.

How do the HFC norms treat affordable housing?

Paragraph 48 of the HFC Directions, 2025 has no separate provisioning row for affordable housing. The affordable housing relief is in the LTV note to paragraph 58. Where the cost of the house or dwelling unit does not exceed ₹10 lakh, the HFC may add stamp duty, registration and other documentation charges to the cost when computing LTV. Above that cost, these charges stay out.

Worked example, made-up numbers

Take an HFC outside the Upper Layer and a loan with ₹40,00,000 outstanding. The standard asset provision by paragraph 48 row is:

Now assume the account slips, with the outstanding unchanged and the realisable value of the security at ₹30,00,000. The uncovered part is ₹10,00,000.

In the first doubtful year, ₹10,00,000 of the ₹17,50,000 provision comes from the uncovered part. A lower realisable value would raise the uncovered part, which carries the higher rate.

Pitfalls in reading HFC provisioning norms

• Assuming the standard rates fit every HFC. The paragraph 48 standard rates exclude Upper Layer HFCs. Paragraph 47 refers every HFC to paragraph 29 of RBI’s NBFC Income Recognition, Asset Classification and Provisioning Directions, 2025, and Chapter IV does not print separate Upper Layer rates.
• Treating a reschedule as a cure. Under paragraph 30, rescheduling alone does not upgrade an asset. The asset must meet the conditions for upgradation.
• Calling every tenor extension a reschedule. Under paragraph 32, extending the tenor of a floating rate loan on reset to keep the equated monthly instalment (EMI) unchanged is not a reschedule if applied uniformly to a class of accounts. Extending or deferring EMIs for individual borrowers is.
• Missing the natural calamity route. Under paragraph 32, where a natural calamity impairs repaying capacity, terms may be rescheduled and the loan is not classified as sub-standard. Under note ii to paragraph 49, provisions made before that reschedule cannot be written back or adjusted against future requirements.
• Assuming which CRE row a third dwelling unit takes. The note to paragraph 48 treats these loans as CRE without naming the row. Check paragraphs 110 and 111 of RBI’s NBFC Credit Facilities Directions, 2025 before picking 0.75% or 1.00%.
• Netting standard provisions. Under the note to paragraph 48, standard asset provisions are not counted when arriving at net NPAs.

Internal limits vary by institution.

Checklist for HFC provisioning at sanction

• Confirm the lender is an HFC, and whether it sits in the Middle Layer or the Upper Layer.
• Tag the loan to the right paragraph 48 row at sanction: teaser, CRE-RH, other CRE, individual housing or other.
• Count the individual’s dwelling units financed, and test for third unit onwards.
• Test end use against paragraph 10(8) before calling the loan housing.
• Check LTV against the paragraph 58 cap, using total outstanding and realisable value.
• Close documentation and insurance gaps, since defective documentation and a denied or part-settled insurance claim are paragraph 34 loss triggers.
• Confirm the valuation is realistic, since paragraph 48 uses realisable value, estimated on a realistic basis, to set the secured part of a doubtful asset.
• Pull the general NPA, sub-standard and doubtful tests from RBI’s NBFC Income Recognition, Asset Classification and Provisioning Directions, 2025, not from memory.