The Reserve Bank of India (RBI) has made additional changes to rules governing deposit-taking housing finance companies (HFCs) and non-banking finance companies (NBFCs), making the rules tighter by slashing the ceiling on public deposits they can hold and trimming the time period on such deposits.

In its review of the regulatory framework for housing finance companies (HFCs), the central bank says after the transfer of regulation of HFCs from the National Housing Bank (NHB), the Reserve Bank had issued a revised regulatory framework for HFCs on October 22, 2020.

In this, it was stated that further harmonisation between regulations of HFCs and NBFCs will be taken up in a phased manner.

“In view of this, the RBI has undertaken a review and proposes to harmonise certain regulations of HFCs with those applicable to NBFCs viz., deposit directions for deposit-taking HFCs, participation of HFCs in various derivative products for hedging purposes, diversification into other financial products, adoption of technical specifications by HFCs under account aggregator ecosystem, etc,” says the RBI.

The draft circular released on Monday proposes to review certain directions for deposit-taking NBFCs, which will harmonise HFC regulations with NBFC regulations further.

Comments on the draft circular are invited from NBFCs (including HFCs) and other stakeholders by February 29, 2024.

As per the new changes, the RBI has enhanced the minimum investment requirements in approved securities (primarily G-secs), from 6.5% of public deposits to 10% by FY25.

It has also enhanced the minimum investment requirements in liquid investments, including investments in approved securities, from 13% of public deposits to 15% by FY25.

It has also capped maximum permissible public deposits to 1.5x of net owned funds (NOF) from 3.0x and capped the maximum tenure of public deposits to 5 years from 10 years. The RBI has also necessitated prior to the RBI intimation for opening a “deposit accepting branch”.

The central bank in its amended guidelines has set the requirement of a minimum NOF of Rs 50 crore and a credit rating of AA or above to open a “deposit accepting branch or appoint an agent on a pan-India basis”. The RBI has also granted permission to enter into co-branded partnerships with credit card issuers.

Implications of harmonisation

According to IIFL securities, all major deposit-taking HFCs are in compliance with the “enhanced requirements of the minimum approved investments, including liquid investments.

“Overall, most of the relevant HFCs are in compliance with these new stringent norms save for PNB HF, Sundaram HF and ICIC HF — who may be impacted at the margin over the longer term,” an IIFL Securities’ research note suggests.

The capping of public deposits at 1.5x of net owned funds reduces HFC’s reliance on them, it says, adding that necessitating diversification of borrowings for some of the companies.

It says most of the deposits raised by HFCs have tenure of less than 5 years, save for PNB HF and ICICI HF where 8-13% of deposits have a maturity of 5+ years. “To sustain the liability tenure, these HFCs may have to issue longer tenure bonds, given the inherently long asset duration of home loans.”

While most of the relevant HFCs are credit-rated AA or above, the requirement of “prior RBI intimation for opening a deposit branch” can be used as a penal tool by the RBI in future, opines the brokerage. On “co-branded credit card partnerships”, the brokerage says it can become an important fee income driver for HFCs.

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