Reserve Bank of India’s Circular on Review of Regulatory Framework for HFC’s and harmonization of regulations available to HFC’s and NBFC’s

Posted On - 22 August, 2024 • By - Sheetal Agarwal

Introduction

According to a recent circular update dated 12th August 2024, the Reserve Bank of India has outlined the significant revised regulatory frameworks for Housing Finance Companies (HFCs) and Non – Banking Finance Companies (NBFCs) as a part of its phased approach towards these entities which was announced in its previous notification.[1] Applicable with effect from 1st January 2025, these framework guidelines are set to further harmonize the present regulations which are applicable to the Housing Finance Companies and the Non – Banking Finance Companies.

Objective and Scope of Harmonization

The basic objective of these recent regulatory changes is to align the present regulations governing the Housing Finance Corporations (HFCs) with the Non – Banking Finance Corporations (NBFCs) along with intending to create a uniformity in the regulations while giving due acknowledgment to the specialized nature of the HFCs. These changes have been made keeping in mind that since the overseeing of regulations of HFCs had been transferred from the National Housing Bank (NHB) to the Reserve Bank of India in August 2019, there has been a consistent effort to integrate the HFCs into the broader realm of the NBFCs and their regulatory framework.

Changes in the Regulatory Frameworks

There have been various changes in the revised regulatory frameworks which have been applicable to several key areas which are as follows:

  1. Public Deposit Acceptance- In order to bring a parity between the adherence of prudential parameters which are similar to those of deposit taking NBFCs, the HFCs would also be bound by the same rules and regulations pertaining to acceptance of public deposits. This would consist of maintaining a higher percentage of liquidity of assets along with aligning safe custody practices with the NBFC standards. Lastly, the Housing Finance Corporations would have to mandatorily ensure full coverage of assets for public deposits along with compliance with the revised limits for acceptance of deposits. Additionally, deposit taking HFCs holding excess deposits as per the revised limits shall also be barred to accept fresh deposits or renew existing deposits until the conformity with the existing limits is achieved.
  2. Restrictions on investments and management of risks- The new rules would lead to restrictions upon the investments in the unquoted shares and refinement of the risk management framework of the HFCs which would include participation in currency derivatives, interest rates and credit default swaps. An entirely new feature of co – branded credit cards has also been introduced by the updated framework.
  3. Branch Operations and Appointment of Agents- The new framework has also led to HFCs being subject to the regulations pertaining to branch operations and appointment of agents for the purposes of collection of deposits which are also equally applicable to the NBFCs. The intent of this provision is to standardize the practice applicable to all the sectors.
  4. Provisions for Accounting Year- In reference to the accounting year, all the HFCs are required to prepare and update their financial statements for the year ending 31st day of March. It has also been stated that the HFCs would have to finalize their balance sheet within a period of 3 – months from the date to which it pertains and whenever a HFC intends to extend the date of its balance sheet as per the provisions under the Companies Act 2013, a prior approval of the National Housing Bank would be required before approaching the Registrar of Companies (RoC). Lastly, in cases wherein an extension of time has been granted by the RoC and National Housing Bank, the HFCs shall be bound to furnish an unaudited pro forma balance sheet as on 31st March of the same year along with the returns due on the said date.
  5. Safe Custody of Liquid Assets- According to the RBI, the regulations on the safe custody of liquid assets shall be in alignment with those of NBFCs in the interest of harmonization of regulations. Accordingly, the instructions mentioned in the paragraph 33 of the Master Directions – Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank of India) directions 2016 on the safe custody of liquid assets/collection of interests on SLR securities shall, mutatis mutandis apply to deposit taking HFCs along with repealing of the previously applicable provisions.
  6. Full Coverage on Public Deposits- The HFCs have also been mandated to ensure that full asset coverage has been available for public deposits and is accepted by them at all times as per the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021.[2] Considering these provisions, it shall be incumbent upon the Housing Finance Corporations concerned to inform the NHB in the cases wherein the above coverage of assets falls short of the liability on account of public deposits.

Additional Updates

Apart from these major changes stated above, various other existing norms have been updated by the notification which include updating the maintenance of minimum percentage of liquid assets with the HFCs, participation in exchange traded currency derivatives and credit default swaps, intimation of maturity of deposits to creditors, maintenance of register of deposits and other regulations which are in compliance with the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016. [3]

With these updates and changes coming into effect from 1st January, 2025; HFCs and NBFCs are required to ensure compliance which shall consist of updating internal policies, aligning with new prudential norms along with ensuring that the regulations also stipulate the specific reporting requirements and changes in the existing regulations which also include those pertaining to deposit maturity notices and practices of record – keeping.

Conclusion

The present move of the Reserve Bank of India to harmonize the regulations pertaining to NBFCs and HFCs is a strategic move in order to streamline the financial sector’s regulatory environment through standardization of practices, introduction of uniform regulatory norms and various changes pertaining to government records. The RBI has also aimed to enhance the stability and transparency of financial institutions and the entities impacted by these changes are also bound to conduct a thorough review of their current practices in order to ensure effective compliance by the due date i.e., 1st January, 2025.

[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10563

[2] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12030

[3] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10563

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