Bridging The Gap: RBI Revises Regulations To Align HFC And NBFC Regulatory Frameworks

Posted On - 27 September, 2024 • By - King Stubb & Kasiva

Introduction

The Reserve Bank of India (“RBI”) has issued a notification outlining a change in the regulations for Housing Finance Companies (“HFCs”).[1] This notification, dated August 12, 2024, follows up on an earlier circular from October 2020[2] which promised a phased harmonization of regulations applicable to both HFCs and Non-Banking Financial Companies (“NBFCs”).

The move comes after the transfer of HFC regulation from the National Housing Bank (“NHB”) to the RBI in August 2019. This notification aims to streamline the regulatory landscape by aligning HFC regulations more closely with those governing NBFCs, while still acknowledging the specialized nature of housing finance companies. The revised regulations, detailed in Parts A and B of the Annex attached to the notification, will come into effect on January 01, 2025. These revisions will necessitate corresponding modifications to existing master directions, including:

  • Master Direction – NBFC – HFC (Reserve Bank) Directions, 2021[3]
  • NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 2016[4]
  • Master Direction – RBI (NBFC– Scale Based Regulation) Directions, 2023[5]

Understanding the Revised Regulations

Guidelines for HFCs regarding Acceptance of Public Deposits

The revised regulations, detailed below, aim to bring HFCs on par with NBFCs.

  • Deposit Maintenance: HFCs will need to maintain a higher percentage of liquid assets against public deposits (15% phased in by July 2025).
  • Deposit Terms: Public deposits can be for 12-60 months only (existing longer terms can be grandfathered).
  • Credit Rating: HFCs must maintain a minimum investment-grade credit rating to accept deposits.
  • Deposit Limits: The maximum public deposit a HFC can hold is reduced to 1.5 times its net owned funds.
  • Branch Regulations: HFCs must follow regulations for opening branches and appointing agents to collect deposits, similar to NBFCs.
  • Unquoted Shares: HFCs will need to set board-approved limits for investments in unquoted shares.

In addition to deposit acceptance regulations, other instructions have also been issued for HFCs:

  • Hedging: HFCs can participate in exchange-traded currency and interest rate futures markets for hedging purposes, subject to specific regulations.
  • Credit Default Swaps (“CDS”): HFCs can buy CDS protection for their corporate bond holdings but cannot sell protection.
  • Co-branded Credit Cards: HFCs are allowed to issue co-branded credit cards following RBI guidelines.
  • Financial Reporting: HFCs must finalize their balance sheet within 3 months and obtain NHB approval before extending deadlines.
  • Information System (“IS”) Audit: HFCs must conduct IS audits as per the latest RBI guidelines on IT governance.
  • Investment through Alternative Investment Funds (“AIFs”): Investments made through AIFs will be considered for calculating HFCs’ Net Owned Funds (“NOF”) under certain conditions.
  • Account Aggregator Ecosystem: HFCs participating as financial information providers or users in the Account Aggregator system must adopt technical specifications set by the RBI.

Guidelines for NBFCs regarding Acceptance of Public Deposits

The revised regulations for NBFCs, detailed below, aim to enhance consumer protection and streamline operations.

  • Nomination Rules: NBFCs must acknowledge receipt of nomination forms and record nomination details on passbooks.
  • Premature Deposit Repayment: NBFCs can allow premature repayment of certain deposits under specific circumstances, such as medical emergencies or natural disasters.
  • Maturity Intimation: NBFCs must notify depositors of deposit maturity at least 14 days before the due date.
  • Deposit Register: NBFCs can maintain a centralized computer database for deposit details, with quarterly updates to branches.
  • Safe Custody of Liquid Assets: The requirement to maintain approved securities in physical form is removed.
  • Information System Audit: NBFCs must conduct IS audits as per the latest RBI guidelines on IT governance.

These amendments are part of the RBI’s ongoing efforts to strengthen the regulatory framework for NBFCs and ensure the safety and interests of depositors.

Conclusion

The RBI’s revised regulations for HFCs and NBFCs mark an important shift towards a more unified regulatory landscape. By aligning deposit acceptance practices and introducing new requirements for financial reporting, liquidity maintenance, and risk management, the RBI aims to enhance the stability and transparency of these financial institutions. These changes are expected to benefit both depositors and the broader financial sector, promoting greater confidence and trust in the Indian financial system.

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12719&Mode=0.

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11988&Mode=0.

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

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

[5] https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550.