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The Reserve Bank of India's (RBI) revised regulations for deposit-taking housing finance companies (HFCs), effective 12 August 2024. HFCs must gradually raise their liquid asset requirements from 13% to 15% by mid-2025, reduce the maximum public deposit holdings to 1.5 times their net owned funds, and limit deposit tenures to five years. While most HFCs are already compliant, some may need to improve liquidity and adjust deposit ratios. These changes are part of the RBI's broader effort to align HFC regulations with those of non-banking financial companies (NBFCs), aiming to strengthen the sector's financial stability.
The Reserve Bank of India (RBI) recently introduced revised guidelines for deposit-taking housing finance companies (HFCs) that aim to strengthen the sector's regulatory framework. According to Crisil Ratings, most HFCs are well-positioned to comply with these new regulations, which were announced on 12 August 2024. The guidelines introduce three significant changes that impact HFCs accepting public deposits. Advertisement
HFCs are now required to gradually increase the proportion of liquid assets they hold against public deposits. The current requirement of 13% will rise to 14% by 1 January 2025, and to 15% by 1 July 2025. This ensures HFCs maintain a stronger liquidity buffer, with an increase in the proportion of unencumbered approved securities held as a percentage of public deposits. The RBI has reduced the maximum allowable amount of public deposits HFCs can hold from three times their net owned funds (NOF) to 1.5 times.
This change took effect immediately, significantly lowering the amount of public deposits HFCs can raise. Lastly, the tenure of public deposits has been reduced from a maximum of 10 years to 5 years, again with immediate effect. These new norms come as HFCs hold an estimated INR 25,000 crore in public deposits, which represents approximately 5% of their total borrowings. According to Subha Sri Narayanan, director at Crisil Ratings, most deposit-taking HFCs are already in compliance with the new guidelines.
However, a few companies may need to improve their liquidity to meet the 15% liquid asset requirement or adjust their incremental deposits to comply with the revised public deposit-to-NOF ratio. The reduction in the maximum tenure of deposits could challenge HFCs by limiting their flexibility in managing asset-liability mismatches, but Narayanan points out that over-5-year deposits typically form a small portion of their borrowing portfolios.
The RBI has provided HFCs with a transition period to meet the new liquid asset norms, allowing them to phase out any excess or non-compliant deposits as they mature. These revisions are part of the RBI's broader effort to align regulations across HFCs and non-banking financial companies (NBFCs), following the transfer of regulatory oversight of HFCs to the RBI in 2019. This move reduces regulatory arbitrage and refocuses the industry on operational and business fundamentals.
In conclusion, the RBI's revised regulations for deposit-taking housing finance companies (HFCs), effective 12 August 2024, aim to enhance sector stability by increasing liquidity requirements, reducing the maximum public deposit holdings, and shortening deposit tenures. These changes are designed to align HFC regulations with those of non-banking financial companies (NBFCs) and address potential liquidity issues. While most HFCs are already compliant, some may need adjustments to meet the new standards. Overall, the RBI's measures are intended to strengthen the financial stability and regulatory consistency of the housing finance sector.
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