Reserve Bank of India tightens HFC norms to bring them on a par with NBFCs

The RBI has cut ceiling on quantum of public deposits that an HFC can hold to 1.5 times from 3 times of its net owned fund

The Reserve Bank of India (RBI) on Monday tightened norms related to public deposit acceptance by housing finance companies (HFCs), which were so far subject to relaxed prudential norms compared to non-banking financial companies (NBFCs).

According to the revised guidelines, the RBI has reduced the ceiling on the quantum of public deposits that a deposit-taking HFC, which is in compliance with all prudential norms and minimum investment grade credit rating, can hold — from 3 times to 1.5 times its net owned fund (NoF).

As a result, deposit-taking HFCs holding deposits in excess of the revised limit will not accept fresh public deposits or renew existing deposits till they conform to the revised limit. However, the existing excess deposits will be allowed to run off till maturity, the RBI said.

 

The central bank said the norms were revised in order to harmonise the guidelines for NBFCs and HFCs. There are 97 HFCs in the country, while deposit-taking NBFCs, including HFCs, are only 26. The regulator has not allowed any new NBFC to accept public deposits for close to two decades now. Deposit-taking NBFCs accounted for 14.6 per cent of the total assets of the NBFCs at end-March 2023. LIC Housing Finance and PNB Housing Finance are some of the deposit-taking HFCs.

Additionally, the RBI has directed deposit-taking HFCs – which are currently required to maintain 13 per cent liquid assets against public deposits held – to maintain, on an ongoing basis, liquid assets to the extent of 15 per cent of public deposits held by them, in a phased manner.

Accordingly, by January 1, 2025, these HFCs have to maintain 14 per cent liquid assets, which include unencumbered approved securities. And, by July 2025, they have to hold 15 per cent of total liquid assets as per cent of public deposits.

Furthermore, the RBI has said that HFCs shall ensure that full asset cover is available for public deposits accepted by them at all times and they have to inform the National Housing Bank (NHB) in case the asset cover falls short of the liability on account of public deposits.

The RBI has also said that public deposits accepted or renewed by HFCs have to be repayable after a period of 12 months or more but not later than 60 months. But, existing deposits with maturities above 60 months can be repaid as per their repayment profile. Currently, HFCs are allowed to accept or renew public deposits repayable after a period of 12 months or more but not later than 120 months from the date of acceptance or renewal of such deposits.

Also, the central bank has said that regulations governing NBFCs on branches and appointment of agents to collect deposits will be applicable to deposit-taking HFCs as well. The RBI has directed that deposit-taking HFCs would have 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.

Among other instructions issued in the revised guidelines, the RBI has said that like NBFCs, all HFCs will now be allowed to hedge the risks arising out of their operations and to issue co-branded credit cards.

To hedge their underlying exposures, the RBI has now allowed HFCs to participate in currency future exchanges. Non-deposit-taking HFCs, with asset size of Rs 1,000 crore, have now been allowed to participate in currency options exchanges. Further, all HFCs have been allowed to participate in interest rate future exchanges and non-deposit-taking HFCs, with over Rs 1,000 crore asset size, have been permitted to participate in the interest rate futures market on recognized stock exchanges, as trading members.

Additionally, HFCs have now been permitted to participate in credit default swaps (CDS) market as users only. The RBI has said that HFCs have to buy credit protection only to hedge their credit risk on corporate bonds they hold and they should not sell protection and hence not enter into short positions in CDS contracts.

“However, they (HFCs) are permitted to exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of buyer of the underlying bond, or by assigning the contract to any other eligible market participant through novation (only in case of events such as winding-up or mergers/acquisitions),” the RBI said.