FD investment: The Reserve Bank of India (RBI) has revised the regulatory framework for investing in HFCs (Housing finance companies) and NBFCs (Non-banking Finance Companies). In the circular, the RBI has tweaked rules for acceptance of public deposits like those relating to nominations, repayment of public deposit to meet certain expenses of an emergent nature, intimation of maturity of deposits to depositors and more.
One of the key changes is the increase in the minimum liquid asset requirement for deposit-taking HFCs, raised from 13 percent to 15 percent of public deposits.
In addition to this, HFCs are now mandated to ensure full asset coverage for public deposits and secure an 'investment grade' rating from credit rating agencies on an annual basis. It is crucial to note that HFCs are restricted from renewing existing deposits or accepting new ones until they acquire an investment grade credit rating.
Moreover, public deposits must possess a maturity period ranging from a minimum of 12 months to a maximum of 60 months. The stringent measures implemented by the RBI highlight the importance of financial stability and regulatory compliance in the housing finance sector.
The RBI said: “Based on a review of the extant regulations applicable to HFCs prescribed vide Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, it has been decided to issue revised regulations as detailed in the Part A of Annex. As part of the exercise, certain regulations applicable to NBFCs have also been reviewed and revised regulations are detailed in Part B of Annex. The revised regulations shall be applicable with effect from January 1, 2025.”
Here are the new rules:
1. Small deposits: The central bank said that when the deposits are tiny (i.e., deposits not exceeding Rs 10,000 in value), they can be paid prematurely to depositors when the depositor makes a request before the expiry of three months from the date of acceptance of such deposits, in entirety, without interest.
2. Other deposits: For other deposits, individuals may request to prematurely withdraw up to 50% of the principal sum or Rs 5 lakh, whichever is lower, within three months of deposit acceptance, without interest, the RBI stated in its circular. The remaining amount with accrued interest will follow the guidelines applicable to public deposits.
According to the RBI circular, “In case of other public deposits, not more than fifty per cent of the amount of the principal sum of deposit or Rs 5 lakh, whichever is lower, may be prematurely paid to individual depositors, at the request of the depositors, before the expiry of three months from the date of acceptance of such deposits, without interest; the remaining amount with interest at the contracted rate shall be governed by the provisions of the extant directions as applicable for public deposits."
3. Nomination process
The NBFCs were asked to establish a suitable process for acknowledging the receipt of a correctly filled out form for nomination, cancellation, and/or modification of a nomination. This acknowledgment should be given to all customers, regardless of their preference.
4. Nomination facility
NBFCs are encouraged to incorporate the practice of indicating the status of the nomination facility on passbooks/receipts with the label "Nomination Registered," along with the Nominee's name on the passbook/receipt, if consented to by the customer.
5. In case of critical illness
In the event of a serious or critical illness, individual depositors may request the premature payment of 100% of the principal sum of their deposit before the three-month expiry date, without accruing any interest. This provision also applies to existing deposit agreements where premature withdrawal is not normally allowed within the first three months.
6. Calamities An emergent expense may arise due to a medical emergency or as a result of a natural disaster declared by the government.
7. Current Agreements The stipulated amount will also be applicable to current deposit contracts in which the depositor is not permitted to withdraw the deposit prematurely within three months.
8. Maturity details The RBI has said that the NBFC should inform the depositor of the maturity details at least 14 days before the due date. Earlier, it was at least two months before the maturity date. The RBI reduced the period from two months to 14 days. As a result, the NBFC must notify the depositor of the deposit's maturity date at least 14 days in advance.
The latest regulatory changes focus on harmonizing the guidelines for branch activities and deposit collection representatives. Housing Finance Companies (HFCs) that have branches or agents operating beyond their registered state boundaries are prohibited from accepting or renewing deposits unless they fulfill particular requirements.
Moreover, the central bank has expanded the investment limitations on unlisted shares, which were initially aimed at Non-Banking Financial Companies (NBFCs), to include HFCs as well. HFCs accepting deposits are obligated to establish internal limits endorsed by the board for investments in unlisted shares of entities that are not subsidiaries or associated with the HFC.