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The National Housing Bank (NHB) has recently called for all housing finance companies (HFCs) with an asset size exceeding Rs 1,000 crore to implement an Early Warning Signals (EWS) framework. This decision comes as a measure to curb financial frauds and prevent the conversion of accounts into non-performing assets (NPAs).
Investigations into fraud reported by HFCs have uncovered that these fraudulent accounts were largely a result of seller impersonation, submission of counterfeit income or employment documents, falsified title deeds, and collusion between the builder and borrower. These discrepancies, however, tend to surface only when borrowers default on their monthly instalments after loan disbursement, as noted by the NHB.
In light of these findings, the NHB has determined that the incorporation of an EWS framework by HFCs is crucial to flag potential risks before an account is classified as an NPA or a fraud account. The NHB circular further emphasized the integration of EWS tracking into the credit monitoring systems of the HFCs, thereby promoting continuous and proactive risk management.
The proposed EWS framework will prompt HFCs to factor in fraud risks within their overall risk management strategies. To ensure effective adoption of the framework, the NHB has directed HFCs to present the circular to their boards for consideration and to formulate a sound implementation strategy. HFCs are expected to have this mechanism in place by April 1, 2024.
In an effort to facilitate the transition, the NHB has furnished an indicative list of early warning signals for individual (retail) borrowers. These include circumstances such as loan disbursement not meeting all pre-disbursement conditions, changes in the borrower's occupation, negative shifts in the sector where the borrower is employed, and difficulty in contacting the borrower during credit monitoring. Furthermore, the regulator has provided an indicative list of EWS for corporate and project loans, thus displaying a comprehensive approach to combat financial fraud across all sectors.
In conclusion, the NHB's push for HFCs to adopt an EWS framework reflects a proactive approach towards risk management in the housing finance industry. By initiating early detection and prevention measures for financial fraud, this move could significantly improve the stability and integrity of the industry. This is a crucial step towards strengthening the trust of investors and customers in these institutions.
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