The Reserve Bank of India (RBI) on Monday tightened norms related to public deposit acceptance by housing finance companies (HFCs), which so far were subject to relaxed prudential norms compared to non-bank finance 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 until they conform to the revised limit. However, the existing excess deposits will be allowed to run off until maturity, the RBI said.
The RBI stated that the norms have been revised to harmonise the guidelines for NBFCs and housing finance companies. There are 97 HFCs in the country, while deposit-taking NBFCs, including HFCs, are only 26. The regulator has not allowed any NBFCs to accept public deposits for close to two decades. Deposit-taking NBFCs accounted for 14.6 per cent of the total assets of the NBFCs at the end of March 2023. LIC Housing Finance and PNB Housing Finance are some of the deposit-taking housing finance companies.
Additionally, the RBI has directed deposit-taking HFCs—who 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 the public deposits held by them, in a phased manner.
Accordingly, by January 1, 2025, these HFCs have to maintain 14 per cent total liquid assets, which includes unencumbered approved securities, to be held as a per cent of public deposits. And by July 2025, these HFCs have to hold 15 per cent of total liquid assets as a 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 stated 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. However, existing deposits with maturities above 60 months can be repaid as per their existing 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.
Additionally, the RBI has said that the regulations governing NBFCs on branches and the appointment of agents to collect deposits will be applicable to deposit-taking HFCs as well. The RBI has directed that deposit-taking HFCs must 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 stated 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 futures exchanges. Non-deposit-taking HFCs, with an asset size of Rs 1,000 crore, have now been allowed to participate in currency options exchanges. Further, all HFCs have also been allowed to participate in interest rate futures 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 recognised stock exchanges, as trading members.
Additionally, HFCs have now been permitted to participate in the credit default swaps (CDS) market as users only. The RBI has stated that HFCs must buy credit protection only to hedge their credit risk on corporate bonds they hold and that they should not sell protection or enter into short positions in the CDS contracts. “However, they are permitted to exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of the 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.
First Published: Aug 12 2024 | 7:31 PM IST
