NHB asks housing finance companies to pay interest on advance EMIs
National Housing Bank
(
NHB
) has directed
housing finance companies
to pay interest to borrowers on any advance payments not immediately adjusted against Equated Monthly Instalments (EMIs) and are parked in sundry or suspense accounts, two people familiar with the development told ET.
The interest must be paid at the same rate as that applied to the customers' home loan. The move aims to promote fair lending practices and prevent borrowers from bearing undue interest costs when their advance payments are not promptly applied.
"NHB is essentially saying that HFCs cannot earn by holding on to customers' advance EMIs," said the chief executive of a housing finance company. "This ensures borrowers aren't unfairly charged interest when they've already paid in advance."
The regulator has also advised HFCs to focus on improving borrower quality rather than relying on upfront collections as a safeguard against defaults. "Some housing finance firms were taking one or two EMIs in advance from economically weaker section (EWS) and low-income group (LIG) borrowers to cushion their books against potential
EMI
bounces," said a senior executive at another HFC. "NHB has made it clear that either disburse a lower loan amount or be prepared to pay interest on the
advance EMI
collected."
The NHB directive aligns with the Reserve Bank of India's broader push for transparent and fair lending practices. Last year in April, the RBI instructed all lenders to begin charging interest only from the actual date of loan disbursement, not from the date of loan agreement execution, after inspections revealed discrepancies.
In several cases, lenders were found charging interest for the entire month, even if the loan was disbursed partway through, resulting in higher borrower costs. The RBI's intervention sought to ensure borrowers are charged only for the actual duration their loans are outstanding.
NHB, which regulates and supervises housing finance companies, has been steadily tightening oversight of the sector. In December 2024, it mandated that all HFCs report non-performing asset (NPA) data on the first of each month, after discovering delays in how some lenders recorded collections from previous months.
In March, the regulator pulled up HFCs for mis-selling insurance policies bundled with home loans, instructing them to immediately halt the sale of insurance products without clearly disclosing terms to borrowers. In May, NHB further tightened its rules for refinancing home loans in under-construction projects. It stated that refinance would only be available if less than half of the construction was completed at the time of the first disbursement, aiming to curb misuse of funds and reduce risk in early-stage projects.
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Hindustan Times
8 hours ago
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The Reserve Bank of India (RBI) warns these events could recur with rising intensity, overwhelming traditional insurance and hedging tools. For India, where 45% of the workforce relies on climate-sensitive agriculture, the stakes are existential. The interconnected nature of these risks means that localized climate disasters can cascade through the entire financial system, affecting institutions and markets far beyond the initially impacted areas. Also, unlike health shocks, climate disks are here to stay. While health crises like Covid-19 caused acute, time-bound disruptions, green swans pose perpetual threats with irreversible tipping points. For example, coastal flooding could permanently displace millions, unlike pandemic recovery cycles. Traditional risk assessment models that extrapolate from historical trends are insufficient for fully appreciating the systemic risks posed by the climate crisis. The RBI is rolling out phased guidelines to address climate risks, including green deposit frameworks, climate disclosure rules, and stress-testing protocols. Specifically, in the context of financial inclusion, banks and microfinance institutions (MFIs) face dual pressures where cyclones and floods destroy collateral (homes, livestock), spike loan defaults, and disrupt operations and policy transition risks where sudden policy changes (e.g., coal phaseouts) could strand assets in carbon-intensive sectors. Microfinance, a $70 billion industry serving 60 million low-income borrowers, is especially exposed. Climate disasters threaten 30-40% of MFI portfolios tied to agriculture and livestock. Women, who form 95% of microfinance clients, face heightened risks of income loss and displacement. Having made some strides in financial inclusion, green swans could reverse those gains. MFIs report repayment rates dropping to 60% post-disasters. Given that these events could reshape finance, particularly for marginalised communities, it would be useful to seek lessons from Bangladesh's experience with similar climate-related challenges in financial inclusion. Bangladesh, which shares many climate vulnerabilities with India, has implemented several innovative approaches to address the financial implications of green swan events. A comparable context is Bangladesh's 1998 floods, where the country's financial sector had to deal with smallholder farmers and microfinance borrowers losing livestock and crops, their primary loan security. Through Green Refinancing, Bangladesh Bank provides low-cost loans for solar energy and waste management, supporting 20 million people through its Solar Home System programme. Grameen Bank's experience with green swan events is pioneering. It transitioned its group-based lending and emergency savings accounts to buffer climate shocks. During floods, repayment flexibility and asset diversification (e.g., shifting from crops to poultry) helped sustain its high recovery rates. A key lesson was that post-disaster loan waivers eroded repayment discipline in Bangladesh. Instead, staggered repayments and climate-resilient livelihood training proved more effective. One of the aspects that the Indian financial sector must prioritize are climate stress tests, which mandate banks to simulate monsoon failures or renewable energy transitions. Green bonds for financial inclusion can channelise funds into affordable flood-resistant housing or drought-tolerant crops. Green swan events represent a profound challenge for India's financial system, particularly in terms of maintaining inclusive financial services for vulnerable populations in the face of increasing climate risks. For India's 800 million people living on under $6 daily, balancing growth with climate resilience isn't optional—it's survival. Bangladesh's mix of regulatory innovation and community-centric finance provides a blueprint, but scaling solutions demands urgent public-private collaboration. As India continues to develop its approach to green swan events, coordination between financial regulators, government agencies, financial institutions, and civil society will be essential to ensure that vulnerable populations are not left behind in the transition to a more climate-resilient financial system. In the age of green swans, preparedness is the only hedge against the unpredictable. This article is authored by Rajalaxmi Kamath, professor, Public Policy, IIM Bangalore.
