In a draft regulatory framework, the central bank said HFCs without investment grade credit rating would not be allowed to raise public deposits or renew existing deposits. 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, will stand reduced from 3 times to 1.5 times of net owned funds.
RBI said that these rules would come into effect from the date of this circular, that is January 15, even as its a draft one at this stage.
HFCs are broadly categorised into two — deposit taking and the ones which are not allowed to raise public deposits. About nine HFCs are allowed to raise public deposits.
The regulator said that all deposit taking HFCs should maintain, on an ongoing basis, liquid assets to the extent of 15% of the public deposits held by them, instead of 13% at present. HFCs shall ensure that full asset cover is available for public deposits accepted by them at all times
The 15% liquid assets rule would be applicable in a phased manner by the end of March 2025.
These rules would put HFCs on par with other NBFCs. Since RBI started regulating mortgage lenders directly from August 2019 after the transfer of regulation from National Housing Bank, it issued various regulations to treat HFCs as a category of NBFCs and to align the regulatory framework for them with that for NBFCs.The new set of rules proposed are in sync with this process.
With the change of ceiling on the quantum of public deposits to 1.5 times of net owned funds, HFCs holding deposits in excess of the revised limit would not be allowed to raise fresh public deposits or renew existing ones, RBI said. The existing excess deposits will however be allowed to run off till maturity.
RBI also plans to restrict HFCs from raising public deposits for more than five years. At present, they are allowed to raise deposits for up to 10 years. “Existing deposits with maturities above sixty months shall be repaid as per their existing repayment profile,” RBI said.
RBI has also placed new restrictions for deposit taking HFCS on their investments in unquoted shares and advised them to set board-approved internal limits for such investments. “Such board-approved internal limits shall form part of overall limits and sub-limits for exposure to the capital market for deposit taking HFCs,” RBI said.
On the other hand, RBI has decided to allow HFCs to participate in currency futures and options, interest rate futures and credit default swaps so that they would be able to hedge the risks arising out of their operations like in case of NBFCs. They are also allowed to diversify their activities into certain fee-based activities without risk participation like in case of NBFCs.
So far as credit cards go, they will be allowed selectively to issue co-branded credit cards with scheduled commercial banks, without risk sharing and with prior approval from the regulator.