On 12th August 2024, the Reserve Bank of India (RBI) issued the revised guidelines to tighten the norms related to public deposit acceptance by Housing Finance Companies (HFCs) in order to bring them on par with Non-Banking Financial Companies (NBFCs).
- The revised guidelines will come into effect from 1st January 2025.
- These guidelines were introduced in “Master Direction – NBFC-HFC (Reserve Bank) Directions, 2021”.
- As per the revised guidelines, deposit-taking HFCs are now required to maintain 15% (as against the current 13%) liquid assets of public deposits held by them in a phased manner i.e. 14% of liquid assets by 1st January, 2025 and to 15% by 1st July, 2025.
Background:
i.These changes were 1st proposed in draft guidelines released on 15th January, 2024.
ii.The Finance Act, 2019 amended the National Housing Bank (NHB) Act, 1987 and transferred the powers to regulate HFCs from NHB to the RBI.
Key Changes:
i.Reduced the ceiling on Quantum of Deposits: RBI has lowered the ceiling on quantum of public deposits taking HFCs, which is in compliance with all prudential norms and minimum investment grade credit rating, from 3 times to 1.5 times of Net owned Fund (NoF).
- In case, Deposit taking HFCs holding deposits in excess of the revised limit are not allowed to accept fresh public deposits or renew existing deposits till they conform to the revised limit.
- But, the existence excess deposits will be allowed to run off till maturity.
ii.Asset Cover: The revised regulations have mandated the HFCs to ensure that the full asset cover is available for public deposits accepted by them at all times.
- Also they are required to inform the NHB in case the above asset cover falls short of the liability on account of public deposits.
iii.Maximum time period for public deposits: The RBI mentioned that public deposits accepted or renewed by HFCs are now required to be repayable after a period of 12 months or more but not later than 60 months (5 years), but, existing deposits with maturities above 60 months can be repaid as per their repayment profile.
- At present, HFCs are allowed to accept or renew public deposits repayable after a period of 12 months (1 year) or more but not later than 120 months (10 years) from the date of acceptance or renewal of such deposits.
iv.Minimum Investment-Grade Credit Rating: It is now mandatory for all deposit-taking HFCs to invariably obtain minimum investment grade credit rating at least once a year only then; they will be eligible to accept public deposits.
- If credit rating of HFC falls below the required grade, it will not be allowed to renew existing deposits or accept new ones until the rating improves.
v.Board-Approval for Internal Limits: As per the new regulations, the deposit-taking HFCs will be required to fix board-approved internal limits separately within the limit of direct investment for investments in unquoted shares of another company, which is not a subsidiary company or a company in the same group of the HFC.
Other Key Points:
i.RBI has now allowed the deposit-taking HFCs to hedge risks arising out of their operations and issue co-branded credit cards.
ii.RBI has allowed the non-deposit taking HFCs, with asset size of Rs 1,000 crore and above to participate in currency option exchanges, which is subject to guidelines issued in the matter by the foreign exchange department of the RBI and necessary disclosures in balance sheet in accordance with guidelines issued by the Securities and Exchange Board of India (SEBI).
- Also, HFCs have now been allowed to participate in Credit Default Swaps (CDS) market as users only.
iii.According to the RBI, regulations for NBFCs with regard to branches and appointment of agents to collect deposits will now be application to deposit-taking HFCs.
iv.All HFCs have been permitted to participate in interest rate future exchanges and non-deposit taking HFCs, with asset size of Rs 1,000 crore and above have also been permitted to participate in the interest rate future market on recognised stock exchanges.
About Reserve Bank of India(RBI):
Governor– Shaktikanta Das (25th Governor of RBI)
Headquarter– Mumbai, Maharashtra
Established– 1st April 1935
