RBI Aligns HFCs and NBFCs Norms

The Reserve Bank of India (RBI) has announced a significant update to the regulatory framework for Housing Finance Companies (HFCs), bringing them in line with the stricter regulations applied to Non-Banking Financial Companies (NBFCs). Post transfer of regulation of HFCs from National Housing Bank (NHB) to Reserve Bank in 2019, HFCs are treated as a category of NBFCs; hence, there has been an ongoing effort to harmonize the rules governing them. Here are the key changes, which will take effect on January 1, 2025:

• Deposit Acceptance Regulations: HFCs accepting public deposits will now face the same regulatory scrutiny as deposit-taking NBFCs. The ceiling on the quantum of deposits has been halved from three times to 1.5 times of the net owned fund. HFCs holding deposits exceeding the new limit will be prohibited from accepting new deposits or renewing existing ones until they comply with the revised guidelines.
• Maintenance of Liquid Assets: The minimum percentage of liquid assets that HFCs must maintain has been increased. By January 1, 2025, HFCs will need to hold 14% of their public deposits in liquid assets, and by July 1, 2025, this requirement will rise to 15%.
• Accounting Year and Financial Statements: HFCs are now required to prepare their financial statements for the year ending on March 31 and finalize their balance sheets within three months. Any extension of the balance sheet date, as per the Companies Act, requires prior approval from the NHB before approaching the Registrar of Companies (RoC). In cases of extension, HFCs must submit an unaudited proforma balance sheet as of March 31 and the returns due on that date to the NHB.

Other norms pertaining to safe custody of liquid assets, full asset cover,  minimum investment grade credit rating, branches and appointment of agents to collect deposits, restrictions on investments in unquoted shares, nomination rules, repayment in urgent cases, intimation of maturity, register of deposits, etc. have been aligned with Master Direction – Non–Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021v and Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016. In addition, HFCs were allowed to accept/renew deposits repayable within 120 months but now maturity has been reduced to 60 months. HFCs are also allowed to hedge the risks arising out of their operations by participating in exchanges, currency futures, etc.

These changes mark a crucial step towards tightening the regulatory oversight of HFCs, ensuring they operate more securely and transparently, like NBFCs. HFCs will need to adapt quickly to these new regulations to maintain compliance and continue their operations smoothly.