RBI Tightens Regulations for Housing Finance Companies: A Move Toward Greater Prudence and Uniformity

The Reserve Bank of India (RBI) has rolled out revised guidelines aimed at gradually tightening the regulatory framework for Housing Finance Companies (HFCs), aligning them more closely with the standards applicable to Non-Banking Financial Companies (NBFCs). This regulatory update, effective from January 1, 2025, marks a significant step towards harmonizing the operational and prudential regulations governing HFCs with those of NBFCs.

The central bank highl’ghted that HFCs currently enjoy relatively lenient prudential norms concerning public deposit acceptance compared to NBFCs. However, given the similar risks associated with deposit acceptance across all categories of NBFCs, the RBI has decided to bring HFCs under the same regulatory umbrella. This move is intended to standardize prudential parameters across both sectors, ensuring a more robust and uniform regulatory environment.

Enhanced Liquid Asset Requirements for HFCs

One of the key changes introduced in the revised regulations is the enhancement of the minimum liquid asset percentage that HFCs must maintain. The RBI has increased the requirement for unencumbered approved securities as a percentage of public deposits from 6.5% to 8%. Similarly, the requirement for total liquid assets, inclusive of unencumbered approved securities, has been raised from 13% to 14% of public deposits.

These adjustments are designed to ensure that HFCs maintain a more substantial buffer of liquid assets, thereby enhancing their ability to meet deposit liabilities promptly. Additionally, the RBI has aligned the regulations governing the safe custody of these liquid assets for HFCs with those applicable to NBFCs, further unifying the regulatory landscape.

Asset Cover and Credit Rating Requirements

The revised guidelines also mandate that HFCs must ensure full asset cover for public deposits at all times, as specified in paragraph 42.1 of the Master Direction for Non-Banking Financial Companies – Housing Finance Companies (Reserve Bank) Directions, 2021. If an HFC’s asset cover falls below the required level, it is now required to immediately notify the National Housing Bank (NHB).

To qualify for accepting public deposits, HFCs must obtain a minimum investment-grade credit rating at least once a year, as outlined in paragraph 25 of the Master Direction. If an HFC fails to maintain this minimum credit rating, it will be prohibited from renewing existing deposits or accepting new ones until the investment-grade rating is restored.

Tighter Controls on Public Deposits

Another significant regulatory change involves the ceiling on the amount of public deposits that deposit-taking HFCs can hold. The ceiling has been reduced from three times to 1.5 times the net owned fund (NOF) for HFCs that comply with all prudential norms and hold the minimum investment-grade credit rating. HFCs that currently hold deposits exceeding this revised limit will not be allowed to accept new deposits or renew existing ones until they comply with the new ceiling. However, existing excess deposits will be allowed to mature according to their original terms.

The RBI has also stipulated that all public deposits accepted or renewed by HFCs must now have a maturity period of at least 12 months and no more than 60 months. Deposits with maturities longer than 60 months, as per previous agreements, will continue to be repaid according to their original schedules.

Uniform Regulations on Branch Openings and Agent Appointments

The revised guidelines further subject HFCs to the same regulations as NBFCs regarding the opening of new branches and the appointment of agents for deposit collection. This alignment is part of the ongoing effort to treat HFCs as a specific category within the broader NBFC sector.

Conclusion: A Harmonized Regulatory Future for HFCs and NBFCs

The RBI’s latest regulatory update is part of its broader strategy to bring HFCs under the same stringent regulatory framework as NBFCs. Since the regulatory oversight of HFCs was transferred from the NHB to the RBI on August 9, 2019, there has been a clear trajectory towards harmonizing the regulations for both sectors. The central bank has previously indicated that this harmonization process would be phased in over two years, ensuring a smooth transition with minimal disruption to the industry.

The revised guidelines signify a crucial milestone in this journey, paving the way for a more stable and resilient financial system. HFCs, which play a pivotal role in the housing finance market, will now operate under a regulatory regime that emphasizes prudence, transparency, and uniformity. As these changes take effect, stakeholders across the financial sector will need to adapt to the evolving landscape, ensuring compliance with the new standards while continuing to serve the needs of borrowers and depositors alike.