Harmonisation of NBFC & HFC regulations: Relevant for PNB HF; Sundaram HF & ICICI HF at the margin

16 Jan 2024 , 10:55 AM

After RBI took over the mandate to regulate HFCs in 2019, it has been harmonising regulations for HFCs and NBFCs. Accordingly, today RBI issued further changes, harmonising HFC’s public deposit acceptance regulations with that of NBFC’s as below:

1. Enhancing the minimum investment requirements in approved securities (primarily G-secs), from 6.5% of public deposits to 10% by FY25.
2. Enhancing the minimum investment requirements in liquid investments (including investments in approved securities) from 13% of public deposits to 15% by FY25.
3. Capping maximum permissible public deposits to 1.5x of net owned funds (NOF) from 3.0x.
4. Capping the maximum tenure of public deposits to 5 years from 10 years.
5. Necessitating prior RBI intimation for opening a deposit accepting branch.
6. Requirement of minimum NOF of Rs500mn and a credit rating of AA or above to open a deposit accepting branch or appoint an agent on a pan-India basis.
7. Granting permission to enter into co-branded partnerships with credit card issuers.

What would be the implications of this harmonisation of regulations? 

(1) All major deposit-taking HFCs are in compliance with the enhanced requirements of the minimum approved investments, including liquid investments. 

(2) Capping of public deposits at 1.5x of NOF reduces HFC’s reliance on them, necessitating diversification of borrowings for some like PNB HF and Sundaram HF whose public deposits are 1.1x of NOF. For BAF, it is 0.5x vs 1.0x for erstwhile HDFC Ltd. 

(3) Most of the deposits raised by HFCs have tenure < 5 years, save for PNB HF and ICICI HF where 8-13% of deposits have a maturity of 5+ years. To sustain the liability tenure, these HFCs may have to issue longer tenure bonds, given the inherently long asset duration of home loans. 

(4) While most of the relevant HFCs are credit rated AA or above, the requirement of prior RBI intimation for opening a deposit branch can be used as a penal tool by RBI in future (for cause).

(5) Theoretically, co-branded credit card partnerships can become an important fee income driver for HFCs. However, this is unlikely to be the case in the near term, given: a) The alreadyhigh credit card penetration amongst prime HL customers. b) Aversion of credit card issuers to on-board NTC / sub-prime customers of affordable HFCs. 

(6) Overall, most of the relevant HFCs are in compliance with these new stringent norms save for PNB HF, Sundaram HF and ICIC HF — who may be impacted at the margin over the longer term.