Housing Finance Companies to Follow NBFC Standards: RBI’s New Deposit Rules

In a significant regulatory shift, the Reserve Bank of India (RBI) has proposed new rules for Housing Finance Companies (HFCs) to align them with the standards applied to Non-Banking Financial Companies (NBFCs). This move aims to tighten deposit mobilization rules and introduce a more robust regulatory framework.

Key Changes Proposed

1. Tighter Deposit Mobilization Rules: The RBI plans to tighten the rules for deposit mobilization by HFCs. This change will bring HFCs, like PNB Housing Finance and LIC Housing Finance, in line with the regulatory norms of NBFCs.
2. Credit Rating and Public Deposit Limits: HFCs without an investment-grade credit rating will be barred from raising public deposits or renewing existing ones. Additionally, the ceiling on the amount of public deposits that can be held by deposit-taking HFCs with a minimum investment-grade credit rating will be reduced from three times to 1.5 times their net-owned funds.
3. Liquid Asset Requirements: HFCs that are permitted to accept public deposits will now be required to maintain liquid assets amounting to 15% of the public deposits, increased from the current 13%, with a phased implementation ending in March 2025.
4. Duration of Public Deposits: The RBI also proposes to limit the duration for which HFCs can raise public deposits to a maximum of five years, reduced from the current limit of 10 years.
5. Diversification into New Areas: Alongside the tightened regulations, the RBI is considering allowing all HFCs to venture into credit card businesses and specific fee-based activities, similar to NBFCs. HFCs are also permitted to engage in currency futures, options, interest rate futures, and credit default swaps to hedge risks.
6. Implementation and Compliance: These rules are expected to be effective from January 15, but as of now, they remain in the draft stage. HFCs exceeding the new deposit ceiling limits are restricted from raising new deposits or renewing existing ones until they comply with the new limits.

The RBI’s move to harmonize the regulations of HFCs with those of NBFCs represents a significant shift in the regulatory landscape for housing finance in India. While these changes will impose stricter standards on HFCs, they also offer new opportunities for diversification and growth. However, the shift also underscores the need for these institutions to adapt quickly to meet the new regulatory requirements, ensuring greater protection for depositors and strengthening the overall financial system.