The Reserve Bank of India (RBI) plans to tighten the norms for deposit-taking housing finance companies (HFCs), reducing the ceiling on quantum of public deposits they can hold, and halving the maximum period for which they can take deposits.

The aforementioned prescriptions are part of RBI’s plan to move HFCs (accepting or holding public deposits) towards the regulatory regime on deposit acceptance as applicable to deposit-taking non-banking finance companies (NBFCs) and specify uniform prudential parameters.

The proposed move, which is contained in a draft circular, is a result of “Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs”.

The central bank has invited comments on the draft circular from NBFCs (including HFCs) and other stakeholders by February 29, 2024.

The ceiling on quantum of public deposits held by deposit taking HFCs, which comply with all prudential norms and minimum investment grade credit rating, will stand reduced from three times to 1.5 times of net owned fund, per the draft circular.

Deposit taking HFCs holding deposits in excess of the revised limit cannot accept fresh public deposits or renew existing deposits till such time the quantum of public deposits is below the revised limit. However, the existing excess deposits will be allowed to run off till maturity.

The longest time period for which HFCs can accept deposits will be cut to 60 months from the current 120 months. Existing deposits with maturities above 60 months can be repaid as per their existing repayment profile. The minimum period for which HFCs can accept deposits continues at 12 months.

Deposit-taking housing finance companies (HFCs) may have to ensure that full asset cover is available for public deposits accepted by them at all times and obtaint obtain minimum investment grade credit rating at least once a year.

Further, it would be incumbent upon HFCs to inform the NHB (Natkional Housing Bank) in case the asset cover falls short of the liability on account of public deposits.

RBI said to be eligible for accepting public deposits, the deposit taking HFCs shall invariably obtain minimum investment grade credit rating at least once a year.

In case their credit rating is below minimum investment grade, such HFCs cannot renew existing deposits or accept fresh deposits thereafter till they obtain an investment grade credit rating.

All deposit taking HFCs will be required to maintain, on an ongoing basis, liquid assets to the extent of 15 per cent (against 13 per cent now) of the public deposits held by them, in a phased manner -- 14 per cent by September 30, 2024 and 15 per cent by March-end, 2025.

RBI said the regulations on safe custody of liquid assets for HFCs will be aligned with those of NBFCs in the interest of harmonization of regulations.

So, the prescription for NBFCs regarding safe custody of Liquid Assets / Collection of Interest on SLR/ statutory liquidity ratio (central government and state government) Securities will be applicable to deposit taking HFCs.

An NBFC is required to open a Constituent’s Subsidiary General Ledger (CSGL) account with a scheduled commercial bank, or the Stock Holding Corporation of India Ltd. (SHCIL) or a dematerialized account with a depository through a depository participant.

The NBFC has to keep the unencumbered approved securities required to be maintained by it in such CSGL account or dematerialised account.

Further, the NBFC has to designate one of the scheduled commercial banks, in the place where the registered office of the non-banking financial company is situated, as its designated banker, entrusting, in physical form, to the bank or SHCIL the unencumbered term deposits and such unencumbered approved securities which have not been dematerialised.

When it comes to opening of branches and appointment of agents to collect deposits, HFCs will be governed by norms applicable to NBFCs.

Deposit taking HFCs will be required to fix Board-approved internal limits separately within the limit of direct investment, for investments in unquoted shares of another company which is not a subsidiary company or a company in the same group of the HFC.

Such board-approved internal limit shall form part of overall limits and sub-limits for exposure to capital market for deposit taking HFCs.