To enhance the stability of housing finance companies (HFCs), and make HFC deposits safer, the Reserve Bank of India (RBI) released a series of changes on January 15, 2023. The key modifications include limiting the quantum of public deposits it can take in proportion to its assets, adjusting the norms for maintaining liquid assets and reducing the maturity period for public deposits.
The most important change is the proposal that HFCs can now only raise deposits to 1.5 times their net owned funds, effectively reducing the current limit of 3 times their net assets by half. The current permission for deposit-taking HFCs to accept or renew public deposits repayable between twelve and 120 months is proposed to be reduced to a maturity period of twelve to sixty months. The revised regulations are in effect immediately, RBI said.
"The ceiling on the quantum of public deposits held by deposit-taking HFCs, which comply with all prudential norms and minimum investment grade credit rating as specified, shall stand reduced from 3 times to 1.5 times of net owned fund with effect from the date of this circular. Deposit-taking HFCs holding deposits over the revised limit shall not 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.” RBI said.
The RBI also mandated the need for HFCs to maintain more liquid assets against public deposits. Currently, this limit of liquid assets set at 13 per cent, will be increased to 15 per cent of the public deposits held by them. Further, HFCs must hold 10 per cent of their public deposits to unencumbered approved securities by March 2025, up from the current 6.5 per cent. Simultaneously, the overall liquid assets, including unencumbered securities, are stipulated to be hiked to 15 per cent from the current 13 per cent during the same period.
RBI states the rationale behind these changes as an attempt to harmonise HFC regulations with NBFCs. Since the transfer of Regulation of HFCs from the National Housing Bank (NHB) to the Reserve Bank with effect from August 09, 2019, various regulations were issued to HFCs treating them as a category of NBFCs and the regulatory framework for HFCs was aligned with that for NBFCs to the extent possible. To be consistent with this policy stance, the regulations of HFCs were harmonised, RBI clarified.
The central bank has capped the maximum maturity of public deposits at five years from the current maximum limit of 10 years. However, existing deposits with maturities above 60 months will be allowed to follow their existing repayment schedule.
For premature withdrawal of public deposits, the new regulations allow repayment of up to 50 per cent of the deposit amount or Rs 5 lakh, whichever is less, within three months from accepting the deposit. This premature repayment does not include any interest, and the remaining amount and agreed-upon interest will be the same as of existing rules for public deposits. Medical emergencies, however, can be considered as an exception to these rules.
The RBI's proposed measures aim to strike a balance between ensuring the financial health of HFCs and safeguarding the interests of depositors.