The Reserve Bank of India (RBI) on January 15 issued a draft circular that seeks to harmonise regulations of housing finance companies (HFCs) with those of non-banking finance companies (NBFCs) in several areas including minimum capital requirement and deposit taking rules among other areas of regulations.
The central bank also proposed that deposit taking HFCs would have to maintain higher liquid assets.
Further, the draft circular proposed to review certain directions for deposit taking NBFCs, the central bank said, adding this exercise is part of further harmonisation of HFC regulations with NBFC regulations.
If you are aware of this development and want to know more on maintaining higher liquid assets, here’s an explainer for you.
What has RBI proposed on liquid assets?
Under the proposed norms, the central bank said deposit taking HFCs have to maintain higher liquid assets in a phased manner.
Currently, deposit taking HFCs are required to maintain 13 percent of liquid assets against public deposits held by them. It has now been decided that all deposit taking HFCs need to maintain liquid assets to the extent of 15 percent of the public deposits held by them, in a phased manner.
According to the proposed norm, deposit taking HFCs will need to take the percentage of liquid assets to 14 percent by September 30, 2024, and to 15 percent by March 31, 2025. Also, it has been proposed that the regulations on safe custody of liquid assets for HFCs will be aligned with those of NBFCs in the interest of harmonisation of regulations, the RBI said.
What are liquid assets?
Liquid assets are SLR (statutory liquidity ratio) securities, which refer to the minimum percentage of deposits a lender has to maintain in government approved securities.
RBI said deposit taking HFCs are required to maintain liquid assets under Section 29B of NHB Act and such liquid assets shall be entrusted for safe custody with specified entities.
Will this impact HFCs?
Jefferies in its report said that Can Fin Homes, LIC Housing Finance, and PNB Housing will have minimal impact from the proposed norms.
The three NBFCs are deposit-taking HFCs with deposits forming 1-31 percent of borrowings.
Further, Manish Jaiswal, Managing Director and Chief Executive Officer at Grihum Housing Finance Ltd (formerly Poonawalla Housing Finance Ltd) said housing finance companies, facing higher liquidity coverage ratio implications, might face elevated borrowing costs, particularly on liabilities garnered through public deposits.
"This could prompt the exploration of alternative borrowing avenues, potentially boosting corporate bonds," Jaiswal added.
What are the other proposed norms?
The maturity of deposits raised will be capped at 60 months from 120 months now. HFCs must obtain an investment-grade credit rating at least once a year. 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 funds with effect from the date of this circular, RBI said in a release.
It added that 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.
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When to submit comments?
Comments on the draft circular are invited from NBFCs, including HFCs, and other stakeholders by February 29, 2024.
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