The Reserve Bank of India (RBI) has been progressively harmonizing the regulations applicable to Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) following the transfer of regulatory oversight of HFCs from the National Housing Bank (NHB) to RBI on August 9, 2019. This transition, outlined in the circular DOR.NBFC (HFC).CC.No.118/03.10.136/2020-21, aims to integrate HFCs into the broader NBFC regulatory framework, ensuring a consistent regulatory environment while acknowledging the specialized nature of HFCs.
The circular emphasized a phased approach over two years to minimize disruptions. In line with this, a comprehensive review of existing regulations for HFCs, as detailed in the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, was undertaken. This review led to the decision to issue revised regulations for HFCs, effective from January 1, 2025, with corresponding updates to NBFC regulations.
Key Regulatory Changes
Acceptance of Public Deposits: A significant aspect of the revised regulations is the alignment of the prudential norms for deposit-taking HFCs with those for NBFCs. Currently, HFCs have more relaxed parameters, but the new regulations will require them to maintain liquid assets equivalent to 15% of their public deposits, up from the current 13%. This increase will be implemented in phases, with incremental steps in January and July 2025.
Safe Custody of Liquid Assets: The regulations concerning the safe custody of liquid assets for HFCs are being harmonized with those for NBFCs. HFCs will now follow the same rules as NBFCs, ensuring consistency in safeguarding public deposits.
Asset Cover and Credit Ratings: HFCs will be required to ensure full asset cover for their public deposits at all times. Additionally, the ceiling on the quantum of public deposits for HFCs will be reduced from three times to 1.5 times their net owned fund, with stricter criteria for credit ratings. HFCs must now obtain a minimum investment-grade rating annually to accept or renew public deposits.
Branch Operations and Investments: The revised regulations also impose restrictions on the opening of branches and appointment of agents for deposit collection by HFCs, aligning them with the rules applicable to NBFCs. Furthermore, new limits have been set on HFCs’ investments in unquoted shares, ensuring a more controlled exposure to the capital market.
Conclusion
The harmonization of regulations for HFCs and NBFCs represents a significant step towards creating a unified regulatory framework that maintains the integrity of financial institutions while catering to the unique operational aspects of HFCs. This alignment, effective from January 2025, is expected to enhance the stability and resilience of the financial sector.
