Salient features of the RBI circular
Currently, HFCs accepting public deposits are subject to more relaxed prudential parameters on deposit acceptance as compared to NBFCs. Since the regulatory concerns associated with deposit acceptance is same across all categories of NBFCs, it has been decided to move HFCs towards the regulatory regime on deposit acceptance as applicable to deposit-taking NBFCs and specify uniform prudential parameters as prescribed under Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
Proposed Critical Changes
Some of the critical changes proposed in the revised regulations as stated below would apply to HFCs accepting or holding public deposits.
Maintenance of minimum percentage of liquid assets
Current guidelines
According to Section 29B of the NHB Act, 1987, HFCs that accept deposits are currently obligated to maintain 13% of liquid assets in relation to their public deposits
Proposed guidelines
All deposit taking HFCs should consistently maintain liquid assets amounting to 15% of their public deposits in a gradual manner as specified in the circular
Also, the minimum investment requirements in approved securities (primarily G-secs), will need to be scaled up from 6.5% of public deposits to 10% by FY 25
Potential impact
Requirement to maintain liquid assets at 15% of public deposits, would require the HFCs to recalibrate their liquidity and risk management strategy
Further the requirement to have a higher investment in approved securities as a percentage of public deposits will potentially have an adverse impact on yields as such investments are not expected to earn a yield which a loan asset would generate
Full cover for public deposits
Current guidelines
HFCs are required to maintain full asset cover for public deposits accepted by them at all times
Proposed guidelines
In addition to ensuring full asset cover for public deposits accepted by them at all times, it would now be incumbent upon HFCs to inform NHB in case the asset cover falls short
Potential impact
The proposed change to report shortfall to the NHB will mean the need to institutionalise oversight on achievement of full asset cover. In practice this could mean that HFCs may end up maintaining greater than 100% cover to avoid any slippages
Ceiling on quantum of deposits
Current guidelines
The ceiling on quantum of public deposits held by deposit taking HFCs, which comply with all prudential norms and minimum investment grade credit rating as specified is 3 times of Net Owned Funds (NOF)
Proposed guidelines
The proposed amendment limits the quantum of public deposits to 1.5 times the NOF
Potential impact
The amendment to lower the quantum of public deposits which can be raised by HFCs would require HFCs to reassess their funding strategies, which could have a consequential negative impact on their overall cost of borrowings
Period for repayment of public deposits
Current guidelines
Currently, HFCs were allowed to accept or renew public deposits repayable after a period of 12 months or more but not later than 120 months (10 years) from the date of acceptance or renewal of such deposits
Proposed guidelines
The proposed changes limit the maximum maturity of public deposits to 60 months i.e. 5 years
Potential impact
The changes will impact the asset liability management practices considering long term nature of housing finance
Regulations on opening of branches and appointment of agents to collect deposits
Current guidelines
No such regulations currently exist for HFCs
Proposed guidelines
HFCs shall now need to:
- Maintain NOF of greater than Rs 500 million
- Credit rating should be greater than AA
Potential impact
The proposed changes align guidelines for opening of branches and appointment of agents with that applicable for NBFCs
Setting limits for investment in unquoted shares
Current guidelines
There are currently no guidelines which limit HFCs for making investment in unquoted shares
Proposed guidelines
As per the proposed changes, HFCs accepting deposits will now need to establish board-approved internal limits for investment in unquoted shares.
This requirement applies specifically to investments in unquoted shares of a company that is neither a subsidiary nor part of the same group as the HFC
Potential impact
This amendment aims to establish governance over HFCs investments in unquoted shares by imposing additional responsibilities on the BOD
Participation in Currency Futures
Current guidelines
There are currently no guidelines pertaining to the participation of HFCs in Currency Futures
Proposed guidelines
HFCs can now participate in currency futures exchanges, subject to the guidelines issued in the matter by Foreign Exchange Department of the RBI and provide necessary disclosures in the balance sheet following guidelines issued by SEBI
Potential impact
This change expands the range of financial instruments accessible to HFCs for mitigating the impact of currency fluctuations and possibly could result in hedge accounting becoming prevalent as part of risk management framework in a HFC
Participation in Interest Rate Futures (IRF)
Current guidelines
There are currently no guidelines regarding the participation of HFCs in IRF
Proposed guidelines
HFCs can now participate in the designated IRF exchanges recognized by SEBI, as clients, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019, for the purpose of hedging their underlying exposures
Potential impact
This change expands the range of financial instruments accessible to HFCs for mitigating the impact of interest rate risk and will better aid in risk management. It could possibly also result in hedge accounting becoming prevalent as part of risk management framework in a HFC
Credit Default Swaps (CDS)
Current guidelines
There are currently no guidelines regarding the participation of HFCs in CDS
Proposed guidelines
HFCs are allowed to engage in the CDS market solely as users, purchasing credit protection exclusively to mitigate the credit risk associated with the corporate bonds in their possession. In their capacity as users, HFCs must adhere to the guidelines outlined by the RBI
Potential impact
This change aids HFCs by offering a fresh method to mitigate credit risk, subject to adherence to regulatory guidelines
Depending on the usage, this change could also potentially further the development of the CDS market in India
How Uniqus sees the proposed changes
The RBI has progressed in its earlier stated objective to ensure parity in regulation for HFCs and NBFCs. The proposed regulations aim to achieve this objective. This is consistent with the RBI’s objective to eliminate regulatory arbitrage between HFCs and NBFCs. The proposed regulations also provide greater flexibility to HFCs to access the derivatives market, which will enable better risk management.
In the short term, the proposed regulations may require certain business, operational and risk management (including ALM) changes by HFCs, however, in the medium to long term it is expected that the proposed changes will provide a level playing field between HFCs and NBFCs and will aid the RBI in enhanced regulation, especially considering that the nature of business of the HFCs and NBFCs is inherently similar i.e. that of lending.
