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Introduction
The Reserve Bank of India (RBI) on Monday, presented a draft circular, strategically outlining a series of measures to bring about a comprehensive alignment of regulations governing Housing Finance Companies (HFCs) with those applicable to Non-Banking Finance Companies (NBFCs). This proposed harmonization extends across multiple critical areas, including minimum capital requirements and deposit-taking rules, reflecting the RBI’s commitment to fostering a more unified and robust regulatory framework.
IN-DEPTH REGULATORY REVIEW
The meticulous regulatory review conducted by the RBI delved into various facets, including deposit directives for deposit-taking HFCs. The examination extended to their involvement in derivative products for hedging, diversification into financial products, and adherence to technical specifications within the account aggregator ecosystem.
TARGETED SCRUTINY OF DEPOSIT DIRECTIVES FOR NBFC’s
The draft circular specifically targets thorough scrutiny of directives governing deposit-taking NBFCs. This strategic move signals the RBI’s commitment to not only align HFC regulations with NBFC standards but to enhance overall regulatory cohesion across the non-banking financial sector.
TRANSITIONING HFCS
Under the proposed guidelines, Housing Finance Companies are poised to adhere to more rigorous standards. Currently operating under relatively lenient prudential parameters for deposit acceptance compared to NBFCs, HFCs will undergo a phased transition towards the regulatory regime applicable to deposit-taking NBFCs.
HEIGHTENED OVERSIGHT FOR PUBLIC DEPOSITS
Revised regulations are slated to apply to HFCs involved in the acceptance or holding of public deposits, subjecting them to heightened regulatory oversight. This underscores the RBI’s commitment to ensuring a consistent and robust approach to safeguarding public deposits across diverse financial entities.
PHASED INCREASE IN LIQUID ASSET REQUIREMENTS
The draft circular introduces a phased increase in liquid asset requirements for deposit-taking HFCs. Currently set at 13% against public deposits, this will incrementally rise to 14% by September 30, 2024, and ultimately reach 15% by March 31, 2025. This phased approach provides HFCs with a structured timeline for compliance, promoting financial stability.
ALIGNMENT OF SAFE CUSTODY RULES
In a significant move towards harmonization, the proposed regulations aim to align rules on the safe custody of liquid assets for HFCs with those applicable to NBFCs. This alignment is designed to streamline operational practices and enhance regulatory coherence.
COMPREHENSIVE REGULATORY LANDSCAPE
The draft circular comprehensively addresses a spectrum of regulatory facets, including the appointment of agents, rates, and tenures of deposits, participation in derivative markets, co-branded credit card issuance, accounting year, audit procedures, and investment through alternative investment funds.
HOW WE CAN HELP?
Our law firm specializes in assisting Housing Finance Companies (HFCs) to comply with the Reserve Bank of India’s proposed regulations. We offer services such as compliance assessments, transition strategy development, legal advisory, risk management, documentation, legal representation, and strategic financial advisory. Our expertise ensures a smooth transition, compliance with regulatory changes, and the long-term resilience of HFCs in the evolving financial landscape.
CONCLUSION
The RBI’s comprehensive approach underscores its commitment to fostering a more uniform, resilient, and innovative regulatory landscape within the financial sector. This balanced and forward-looking strategy aims not only to enhance prudential norms for HFCs but also to establish a cohesive and adaptable framework for the entire spectrum of non-banking financial entities, aligning with evolving market dynamics and global best practices.
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