RBI releases draft circular on HFCs and NBFCs
FinTech BizNews Service
Mumbai, January 15, 2024: The Reserve Bank of India today released the draft circular on ‘Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs’. Comments on the draft circular are invited from NBFCs (including HFCs) and other stakeholders by February 29, 2024.
The Reserve Bank has undertaken a review and proposes to harmonise certain regulations of HFCs with those applicable to NBFCs viz., deposit directions for deposit taking HFCs, participation of HFCs in various derivative products for hedging purposes, diversification into other financial products, adoption of technical specifications by HFCs under Account Aggregator ecosystem, etc. The draft circular also proposes to review certain directions for deposit taking NBFCs. This exercise is part of further harmonisation of HFC regulations with NBFC regulations.
Guidelines regarding Acceptance of Public Deposits
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. Accordingly, the revised regulations as stated in subsequent paragraphs would be applicable to HFCs accepting or holding public deposits.
Maintenance of a minimum percentage of liquid assets
It has now been decided that all deposit taking HFCs shall maintain, on an ongoing basis, liquid assets to the extent of 15 per cent of the public deposits held by them, in a phased manner.
Safe Custody of Liquid Assets
It has been decided that the regulations on safe custody of liquid assets for HFCs shall be aligned with those of NBFCs in the interest of harmonization of regulations.
Full cover for public deposits
4. HFCs shall ensure that full asset cover is available for public deposits accepted by them at all times in terms of para 42.1 of Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021. Henceforth, it would be incumbent upon the HFC concerned to inform NHB in case the above asset cover falls short of the liability on account of public deposits.
HFCs shall invariably obtain minimum investment grade credit rating as specified in para 25 of applicable Master Direction at least once a year. In case their credit rating is below minimum investment grade, such HFCs shall not renew existing deposits or accept fresh deposits thereafter till they obtain an investment grade credit rating.
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, 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 in excess of 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.
Restrictions on investments in unquoted shares
It is advised that henceforth, deposit taking HFCs shall 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.
Other instructions
It has been decided that HFCs shall also be allowed to hedge the risks arising out of their operations like in case of NBFCs. Further, HFCs shall be allowed to diversify their activities into certain fee-based activities without risk participation like in case of NBFCs, duly ensuring compliance to statutory provisions/ regulations prescribed for such activities.
Participation in exchange traded currency derivatives
In order to hedge their underlying exposures, HFCs are allowed to participate in the following SEBI recognized exchanges, as clients, subject to adherence to relevant instructions as issued by the Reserve Bank:
Participation in Currency Futures – All HFCs can participate in currency futures exchanges, subject to the guidelines issued in the matter by Foreign Exchange Department of the Reserve Bank and necessary disclosures in balance sheet in accordance with guidelines issued by SEBI.
Participation in Currency Options - Non-deposit taking HFCs with asset size of Rs. 1000 crore and above can participate in currency options exchanges subject to the guidelines issued in the matter by Foreign Exchange Department of the Reserve Bank and necessary disclosures in balance sheet in accordance with guidelines issued by SEBI.
Participation in Interest Rate Futures
All HFCs can participate in the designated Interest rate Futures (IRF) exchanges recognized by SEBI, as clients, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 dated June 26, 2019, as amended from time to time, for the purpose of hedging their underlying exposures.
Non-deposit taking HFCs with asset size of Rs.1,000 crore and above (as per audited balance sheet of immediately preceding financial year) are permitted to participate in the interest rate futures market permitted on recognized stock exchanges, as trading members, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 dated June 26, 2019, as amended from time to time.
Credit Default Swaps (CDS)
Apart from complying with relevant instructions governing CDS, HFCs, as users, shall also ensure adherence to the guidelines as provided in Annex XIV of Master Direction – Reserve Bank of India (Non-Banking Financial Company– Scale Based Regulation) Directions, 2023, as amended from time to time, which shall be applicable, mutatis-mutandis, to them.
Comments/ feedback, if any, on the draft circular may be forwarded to:
The Chief General Manager
Department of Regulation, Central Office
Reserve Bank of India
2nd Floor, Main Office Building
Shahid Bhagat Singh Marg, Fort
Mumbai – 400 001
or
by email
For further details: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4371
