The Reserve Bank of India (RBI) has introduced stricter regulations for housing finance companies (HFCs) concerning the acceptance of public deposits, aligning them more closely with the norms applicable to non-banking financial companies (NBFCs). Previously, HFCs were subject to more relaxed prudential norms compared to NBFCs.
Key Changes Under the Revised Guidelines:
- Reduced Ceiling on Public Deposits: The RBI has lowered the limit on the amount of public deposits that a compliant deposit-taking HFC can hold, from three times to 1.5 times its net owned fund (NoF). HFCs exceeding this revised limit will be prohibited from accepting new deposits or renewing existing ones until they conform to the new threshold. However, any existing excess deposits will be allowed to mature naturally.
- Increased Liquid Asset Requirements: HFCs are now required to maintain a higher percentage of liquid assets against their public deposits. Currently, they must hold 13% in liquid assets, but this will increase to 14% by January 1, 2025, and further to 15% by July 2025. These liquid assets must include unencumbered approved securities.
- Public Deposit Repayment Terms: The RBI has revised the terms for public deposits accepted or renewed by HFCs, specifying that they must be repayable within 12 to 60 months. Existing deposits with maturities exceeding 60 months can continue according to their original terms.
- Harmonization with NBFC Regulations: The revised guidelines also extend certain NBFC regulations to deposit-taking HFCs. This includes rules governing the establishment of branches, appointment of agents for deposit collection, and setting board-approved internal limits for investments in unquoted shares.
- Participation in Financial Markets: The RBI has broadened the financial activities permitted for HFCs. They are now allowed to hedge risks arising from their operations, participate in currency futures and options exchanges, and engage in interest rate futures markets. Additionally, HFCs can now participate in the credit default swaps (CDS) market as users, but they are restricted to buying protection for hedging credit risk and cannot take short positions in CDS contracts.
- Monitoring Asset Cover: HFCs are required to ensure that their asset cover for public deposits is fully maintained at all times. Any shortfall in this cover must be reported to the National Housing Bank (NHB).
These measures are part of the RBI’s ongoing efforts to harmonize the regulatory framework for HFCs and NBFCs, ensuring greater stability and reducing the risks associated with public deposit acceptance in the financial sector.
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