RBI Proposes Harmonized Regulations for Housing Finance Companies and NBFCs
Draft Framework for Regulatory Harmonization
On January 15, the Reserve Bank of India (RBI) released a draft framework aimed at harmonizing the regulations for Housing Finance Companies (HFCs) and Non-Banking Finance Companies (NBFCs). This initiative covers multiple areas, including deposit directions. The banking regulator has invited NBFCs, HFCs, and other stakeholders to provide comments by February 29, 2024.
RBI’s draft circular also indicates that certain directions for deposit-taking NBFCs will be reviewed.
Review of HFC Regulations and Proposed Changes
The RBI has reviewed deposit directions for deposit-taking HFCs, participation of HFCs in various derivative products for hedging purposes, diversification into other financial products, and adoption of technical specifications by HFCs under the Account Aggregator ecosystem. Consequently, the central bank has proposed tighter regulations for housing finance firms.
At present, HFCs accept public deposits and are subject to more relaxed prudential parameters on deposit acceptance compared to NBFCs. The RBI stated, “Since the regulatory concerns associated with deposit acceptance are the same across all categories of NBFCs, it has been decided to move HFCs towards the regulatory regime on deposit acceptance as applicable to deposit-taking NBFCs and specify uniform prudential parameters as prescribed under the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 2016″.
The revised regulations will apply to HFCs accepting or holding public deposits.
Enhanced Liquid Asset Requirements for HFCs
Currently, deposit-taking HFCs are required to maintain 13% of liquid assets against public deposits held by them. The RBI has now decided that all deposit-taking HFCs need to maintain liquid assets to the extent of 15% of the public deposits held by them, by the end of March 31, 2025.
Furthermore, the regulations on safe custody of liquid assets for HFCs will be aligned with those of NBFCs in the interest of harmonization of regulations. Consequently, instructions on Safe Custody of Liquid Assets/Collection of Interest on SLR Securities will be applicable to deposit-taking HFCs, and the current regulations on the safe custody of approved securities, as contained in the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, will be repealed.
Adjustments to the Ceiling on Public Deposits
The ceiling on the quantum of public deposits held by deposit-taking HFCs that comply with all prudential norms and possess a minimum investment-grade credit rating will be reduced from 3 times to 1.5 times of net owned fund, effective from the date of the circular. Deposit-taking HFCs holding deposits above the revised limit will not be permitted to accept fresh public deposits or renew existing deposits until the quantum of public deposits falls below the revised limit.
Diversification Opportunities for HFCs
The RBI has also stated that HFCs will be allowed to diversify their activities into specific fee-based activities without risk participation, similar to NBFCs. However, HFCs must ensure compliance with statutory provisions and regulations prescribed for such activities.
Following the transfer of HFC regulation from the National Housing Bank (NHB) to the RBI, a revised regulatory framework for HFCs was issued on October 22, 2020. According to this circular, further harmonization between HFC and NBFC regulations will be carried out in a phased manner.
