RBI in action:
RBI tightens regulations for HFCs
The Reserve Bank of India (RBI) has introduced stricter regulations for Housing Finance Companies (HFCs) to align their public deposit norms with those of Non-Banking Financial Companies (NBFCs). This move aims to enhance regulatory parity between the two sectors.
Revised Deposit Limits
Ceiling Reduction: The RBI has halved the limit on public deposits that HFCs can hold, reducing it from three times to 1.5 times their net owned fund (NoF). HFCs that exceed this limit must stop accepting or renewing public deposits until they comply with the new cap. Existing excess deposits can mature as scheduled.
Maturity Period: The maximum period for accepting or renewing public deposits has been reduced from 120 months to a range of 12 to 60 months. Deposits with maturities beyond 60 months can be repaid according to their current terms.
Enhanced Liquidity Requirements
Liquid Asset Ratio: HFCs are now required to maintain liquid assets at 15% of public deposits. This requirement will be phased in, with 14% by January 1, 2025, and 15% by July 2025.
Asset Cover: HFCs must ensure full asset cover for public deposits at all times and report any shortfall to the National Housing Bank (NHB).
Additional Regulatory Measures
Regulatory Parity: HFCs will now adhere to the same RBI regulations as NBFCs regarding branches and agents collecting deposits.
Investment Limits: HFCs must establish board-approved internal limits for direct investments in unquoted shares of non-subsidiary companies and companies not within the same group.
Hedging and Market Participation
Hedging Instruments: HFCs are now permitted to hedge operational risks using currency futures, interest rate futures, and credit default swaps (CDS). They can purchase CDS for credit risk protection but cannot sell protection or enter short positions.
Market Participation: Non-deposit-taking HFCs with assets over ₹1,000 crore can participate in currency options exchanges, while all HFCs are allowed to engage in interest rate futures.
Commenting on new HFCs regulation Manushree Saggar, Senior Vice President & Sector Head – Financial Sector Ratings, ICRA Ltd. said
“The changes in the risk-weighted assets for undisbursed amount of housing loans/other loans would lead to some increase in reported Tier I capital (0.5% – 2%) for affordable housing finance companies (AHFCs), which have a significant share of the portfolio at 35% risk weight. However, the impact is unlikely to be significant as the share of undisbursed loans is relatively low at 5-10% and these AHFCs are comfortably placed on the capital front.”
“The final guidelines regarding acceptance of public deposits by HFCs are largely in line with the draft norms issued in January 2024, except that of entities being given an additional time of six months (till January 2025 and July 2025) to comply with the requirements. In ICRA’s view, the changes are unlikely to materially impact deposit-accepting HFCs, given the adequate on-balance sheet liquidity available and their deposits being within the prescribed ceiling. However, there could be a higher cost of compliance.” he added.
