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Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs

Reserve Bank of India (RBI) has reviewed the regulatory framework for Housing Finance Companies (HFCs) and harmonised the regulations applicable to HFCs and Non-Banking Financial Companies (NBFCs).

What are the revised regulations on maintenance of minimum percentage of liquid assets by HFCs?

In terms of Section 29B of the National Housing Bank (NHB) Act, 1987, all deposit taking HFCs shall maintain, on an ongoing basis, liquid assets as a percent of the public deposits held by them, as specified below –

Timeline Unencumbered approved securities, to be held as a percent of public deposits Total liquid assets along with unencumbered approved securities to be held as a percent of public deposits
Currently 6.5% 13%
January 01, 2025 8% 14%
July 01, 2025 10% 15%

What are the revised regulations on deposits accepted by HFCs?

Extant regulations Revised regulations
The deposit taking HFCs shall invariably obtain minimum investment grade credit rating at least once a year. In case their credit rating is below the minimum investment grade, such HFCs shall not renew existing deposits or accept fresh deposits thereafter till they obtain an investment grade credit rating.
HFC having obtained credit rating for its public deposits not below the minimum investment grade rating and complying with all the prudential norms, may accept public deposits not exceeding 3 times of its Net Owned Fund (NOF). The ceiling on quantum of public deposits held by deposit taking HFCs, which comply with all prudential norms and minimum investment grade credit rating shall be 1.5 times of NOF.
HFCs are allowed to accept or renew public deposits repayable after 12 months or more but not later than 120 months from the date of acceptance or renewal of such deposits. The public deposits accepted or renewed by HFCs shall be repayable after 12 months or more but not later than 60 months.

What are the revised regulations on branches and appointment of agents to collect deposits by HFCs?

An HFC entitled to accept public deposits shall open its branch or appoint agents if its –

  • NOF is up to ₹50 crore – within the State where its registered office is situated
  • NOF is more than ₹50 crore and its credit rating is AA or above – anywhere in India
  • Asset size is more than ₹50 crore and credit rating is below AA – within the State where its registered office is situated

What are the revised regulations on participation by HFCs in derivative contracts?

  • To hedge their underlying exposures, HFCs can participate in the following SEBI recognized exchanges –
Type of exchange Participation as Type of HFCs
Currency Futures Clients All HFCs
Currency Options Clients Non-deposit taking HFCs with asset size of ₹1000 crore and above
Interest Rate Futures Clients All HFCs
Interest Rate Futures Trading members Non-deposit taking HFCs with asset size of ₹1,000 crore and above (as per audited balance sheet of immediately preceding financial year)
  • HFCs can participate in Credit Default Swaps (CDS) market as users only and they shall buy credit protection only to hedge their credit risk on corporate bonds they hold. 
  • They shall not sell protection and hence, shall not enter into short positions in the CDS contracts. 
  • However, they are permitted to exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of buyer of the underlying bond or by assigning the contract to any other eligible market participant through novation (only in case of events such as winding-up or mergers / acquisitions). 

What are other regulations applicable to HFCs?

  • HFCs are allowed to issue co-branded credit cards.
  • HFCs shall prepare their financial statements for the year ending on the 31st day of March and shall finalise their balance sheet within 3 months from the date to which it pertains. 
  • The investments / loans / exposures to subsidiaries, companies in the same group and other HFCs, in excess of 10% of owned fund, is reduced from the owned fund, to arrive at NOF of an HFC. In this context, investment made by HFC in entities of the same group, either directly or indirectly, for example through an Alternative Investment Fund (AIF), shall be treated in the same manner, provided the funds in the AIF (company) have come from HFC to the extent of 50% or more; or where the beneficial owner in the case of AIF (trust) is the HFC and 50% of the funds in the Trust have come from the HFC. 

What are the revised regulations on deposits accepted by NBFCs?

Extant regulations Revised regulations
Where an NBFC, whether at its sole discretion or at the request of the depositor, repays a public deposit after 3 months from the date of its acceptance, but before its maturity (including premature repayment in the case of death of the depositor), it shall pay interest at the following rates –
  • After 3 months but before 6 months – No interest
  • After 6 months but before the date of maturity – The interest payable shall be 2% lower than the interest rate applicable to a public deposit for the period for which the public deposit has run or if no rate has been specified for that period, then 3% lower than the minimum rate at which public deposits are accepted by the NBFC.
 In addition to the extant regulations, for an NBFC not being a problem NBFC, to meet certain expenses of an emergent nature –
  • ‘Tiny deposits’ may prematurely be paid to individual depositors, at the request of the depositor, before the expiry of 3 months from the date of acceptance of such deposits, in entirety, without interest.
  • In case of other public deposits, not more than 50% of the amount of the principal sum of deposit or ₹5 lakh, whichever is lower, may be prematurely paid to individual depositors, at the request of the depositors, before the expiry of 3 months from the date of acceptance of such deposits, without interest and the remaining amount with interest at the contracted rate.
  • In cases of critical illness, 100% of the amount of the principal sum of deposit, may be prematurely paid to individual depositors, at the request of the depositors, before the expiry of 3 months from the date of acceptance of such deposits, without interest.

 ‘Problem NBFC’ means an NBFC which –

  • Has refused or failed to meet within 5 working days any lawful demand for repayment of the matured public deposits; or
  • Intimates the Company Law Board (CLB) about its default to a small depositor in repayment of any public deposit or part thereof or any interest thereupon; or
  • Approaches RBI for withdrawal of the liquid asset securities to meet its deposit obligations; or
  • Approaches RBI for any relief / relaxation / exemption from any directions for avoiding default in meeting public deposit or other obligations; or
  • Has been identified by RBI to be a problem NBFC either suo moto or based on the complaints from the depositors about non-repayment of public deposits or on complaints from the company’s lenders about non-payment of dues.

‘Tiny deposit’ means the aggregate amount of public deposits not exceeding ₹10,000/- standing in the name of the sole or the first named depositor in the same capacity in all the branches of the NBFC.

What are the revised regulations on intimation of maturity of deposits to depositors by NBFCs?

Extant regulations Revised regulations
NBFCs shall intimate the details of maturity of the deposit to the depositor at least 2 months before the date of maturity of the deposit. NBFC shall intimate the details of maturity of the deposit to the depositor at least 14 days before the date of maturity of the deposit.

From when are the revised regulations applicable?

The revised regulations shall be applicable with effect from January 01, 2025.

What are revised regulations on risk weights for HFCs?

The risk weight of fund-based and non-fund based exposures to ‘Commercial Real Estate-Residential Building’, which are classified as standard, shall be 75%. For exposures under this category, which are not classified as standard, the risk weight shall be as per the category ‘Other Assets (Others)’, which presently is at 100% (applicable w.e.f. August 12, 2024).


References

Reserve Bank of India. (2016, August 25). 'Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (Updated as on October 10, 2023)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10563

Reserve Bank of India. (2021, February 17). 'Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 '. Retrieved from https://rbidocs.rbi.org.in/rdocs/content/pdfs/MD100017022021_A.pdf

Reserve Bank of India. (2021, February 17). 'Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 (Updated as on March 21, 2024)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12030

Reserve Bank of India. (2023, October 19). 'Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023'. Retrieved from https://rbidocs.rbi.org.in/rdocs/content/pdfs/106MDNBFCs19102023_ANN.pdf

Reserve Bank of India. (2023, October 19). 'Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (Updated as on March 21, 2024)'. Retrieved from https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550

Reserve Bank of India. (2024, August 12). 'Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12719&Mode=0

Reserve Bank of India. (2024, August 12). 'Review of Risk Weights for Housing Finance Companies (HFCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12720&Mode=0


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