The National Housing Bank has begun forensic audits of mid-sized housing finance firms over concerns regarding loan misclassification and property valuation. Regulators are investigating if these lenders are inflating housing-related assets to meet mandatory business criteria. For investors, this move highlights potential liquidity risks and increased compliance pressure for smaller sector players.
The National Housing Bank (NHB) has launched a focused supervisory effort to address potential compliance gaps among smaller and mid-sized housing finance companies in India. The regulator is currently auditing loan portfolios to verify if firms are accurately classifying their assets to meet the mandatory 60 percent Principal Business Criteria (PBC). Under existing regulations, housing finance companies must maintain at least 60 percent of their total assets in housing finance to retain their status and access concessional refinancing from the NHB.
At the core of the investigation is the classification of Loan Against Property (LAP) products. Reports indicate that some lenders may have been incorrectly reporting LAP assets as standard housing loans. By doing so, these companies could artificially inflate their housing portfolio percentage, masking a shortfall in their mandatory business thresholds. Since LAP products are typically higher-risk and offer different interest rate structures compared to home loans, misclassification obscures the actual risk profile of a lender’s asset book.
Beyond loan classification, the NHB is examining property valuation processes. Regulatory standards require independent, rigorous verification for large-ticket loans, typically those exceeding Rs 50 lakh, with the lower of two appraisals used to calculate the loan-to-value ratio. Investigators are looking into whether some lenders have bypassed these protective measures to increase loan sizes. If property valuations have been consistently overstated, it creates a risk of higher credit losses and non-performing assets (NPAs) if the housing market faces any downturn.
For investors, these audits serve as an important indicator of potential risks in the mid-sized housing finance space. Access to NHB’s refinancing window is a major source of low-cost liquidity for these companies. If a company is found to be in violation of these norms, it faces a risk of losing access to this funding, which could immediately increase its cost of borrowing and put pressure on net interest margins. Additionally, a stricter regulatory environment often leads to higher compliance costs, which can temporarily affect operating expenses.
The shift toward a more proactive, governance-heavy supervisory model means that mid-sized lenders with weak internal controls or aggressive growth strategies may face more scrutiny than larger, well-established players. Investors may track future updates from the company’s management regarding regulatory compliance, auditor comments on asset quality, and any changes in the cost of funds. The outcome of these forensic audits could also force some lenders to recalibrate their business models, which might influence their growth trajectory in the coming quarters.