The Reserve Bank of India (RBI) has issued a circular dated August 12, 2024, as part of the phased approach announced in the earlier circular. The Circular outlines the revised regulatory framework for Housing Finance Companies (HFCs) and Non-Banking Finance Companies (NBFCs). This circular marks a significant step in harmonizing the regulatory landscape for these entities.
Harmonisation Objectives and Scope
The primary objective of the recent regulatory changes is to align the regulations governing HFCs with those applicable to NBFCs. Since the regulatory oversight of HFCs was transferred from the National Housing Bank (NHB) to the RBI on August 9, 2019, there has been a consistent effort to integrate HFCs into the broader NBFC regulatory framework. This integration is intended to create uniformity in regulations while acknowledging the specialized nature of HFC operations.
Revised Regulatory Framework
The revised regulations, effective from January 1, 2025, introduce significant changes in several key areas:
(a) Acceptance of Public Deposits: HFCs will now adhere to prudential parameters similar to those of deposit-taking NBFCs. This includes maintaining a higher percentage of liquid assets and aligning safe custody practices with NBFC standards. HFCs must now ensure full asset cover for public deposits and comply with revised limits on public deposit acceptance.
(b) Branch Operations and Agents: HFCs will be subject to regulations concerning branch operations and the appointment of agents for deposit collection, mirroring those imposed on NBFCs. This change is intended to standardize practices across the sectors.
(c) Investment Restrictions and Risk Management: New rules will restrict investments in unquoted shares and refine the risk management framework for HFCs, including participation in currency derivatives, interest rate futures, and credit default swaps. The updated framework also introduces provisions for the issuance of co-branded credit cards.
Implementation and Compliance
HFCs and NBFCs must prepare for these regulatory changes by January 1, 2025. Compliance will involve updating internal policies, aligning with new prudential norms, and ensuring that all operational practices are in accordance with the revised guidelines. The regulations also stipulate specific reporting requirements and modifications to existing regulations, including those related to deposit maturity notices and record-keeping practices.
Conclusion
The RBI’s initiative to harmonize regulations for HFCs and NBFCs is a strategic move to streamline the financial sector's regulatory environment. By standardizing practices and introducing uniform regulatory measures, the RBI aims to enhance the stability and transparency of financial institutions. Entities affected by these changes should conduct a thorough review of their current practices and prepare for the upcoming regulatory adjustments to ensure smooth compliance by the effective date.
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