The Reserve Bank of India (RBI) has proposed a meticulous plan, outlined in a draft circular, to bolster regulatory frameworks for housing finance companies (HFCs). The initiative aims to align HFCs more rigorously with non-banking financial companies (NBFCs). The proposal suggests gradually increasing liquid assets for deposit-taking HFCs, raising the target from 13% to 15% of public deposits by March 2025. The RBI recommends a phased approach, starting with a 14% minimum threshold by September 2024. Effective immediately, the revised regulations also shorten the repayment window for public deposits to 60 months. These measures signify the RBI's strategic effort to fortify HFCs' regulatory framework. Stakeholder comments are invited until February 29.
The Reserve Bank of India has introduced an extensive plan, outlined in a perceptive draft circular, to systematically strengthen the regulatory frameworks for housing finance companies (HFCs). This initiative is geared towards cultivating a more stringent alignment with the rigorous standards applicable to non-banking financial companies (NBFCs). The detailed proposal suggests a careful increase in the amount of liquid assets and approved securities for deposit-taking HFCs. This adjustment, aiming to raise the current 13% to a strong 15% of public deposits, is planned for completion by March 2025.
The RBI recommends a gradual approach, with a minimum threshold of 14% by September 2024 and the final target of 15% by March 2025. Interested stakeholders have been courteously invited to submit their considered comments on this regulatory paradigm shift by February 29. The RBI articulates the rationale behind this regulatory shift, stemming from shared concerns about deposit acceptance across all categories of NBFCs. Consequently, the decision has been made to usher HFCs into the regulatory framework on deposit acceptance that is applicable to deposit-taking NBFCs, establishing uniform prudential parameters.
The RBI, stipulating the revised regulations, puts them into immediate effect, with specified exceptions. At present, HFCs enjoy the privilege of accepting or renewing public deposits, repayable after a stipulated period of 12 months or more, though not exceeding 120 months from the date of acceptance or renewal. The revised directive truncates this repayment window, necessitating repayment not later than 60 months, and is effective immediately. In instances where an HFC lacks a credit rating meeting the minimum investment grade, renewal of existing deposits or the acceptance of fresh deposits remain prohibited until an investment-grade credit rating is secured.
Regarding the upper threshold of public deposits held by deposit-taking HFCs, the RBI has judiciously reduced this limit from three times to 1.5 times of net-owned funds. Simultaneously, the draft circular mandates that deposit-taking HFCs consistently maintain liquid assets, ensuring ongoing compliance to the extent of 15% of the public deposits held by them. Any deficiency in the asset cover vis-à-vis the liability arising from public deposits necessitates a prompt disclosure to the National Housing Bank by the concerned HFC. The draft circular mandates deposit-taking HFCs to establish board-approved internal limits for investing in unquoted shares of entities outside the scope of subsidiaries or group companies.
These internal limits must be meticulously integrated into the broader framework of overall and sub-limits delineated for exposure to the capital market for deposit-taking housing finance companies. Concurrently, the RBI has proposed allowing housing finance companies to hedge risks from their operations. These entities would also be permitted to diversify into fee-based activities without involving risk. The RBI's propositions reflect a careful and strategic approach to strengthening the regulatory framework for housing finance entities, aligning them judiciously with broader financial norms.
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