The Reserve Bank of India on Monday suggested tightening rules for home finance businesses by shortening the maturity period for public deposits to five years and increasing the requirement to keep liquid assets against obligations. Currently, housing finance companies (HFCs) are permitted to take or renew public deposits repayable after a period of 12 months or more but no later than 120 months from the date of acceptance or renewal of such deposits, according to a draft circular issued by the RBI on February 29 and asking public feedback.

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The draft circular said, "It has been decided that henceforth, with effect from the date of this circular, the public deposits accepted or renewed by HFCs shall be repayable after a period of 12 months or more but not later than 60 months. Existing deposits with maturities above sixty months shall be repaid as per their existing repayment profile." 

In case their credit rating is below minimum investment grade, such HFCs would not renew existing deposits or accept fresh deposits thereafter till they obtain an investment grade credit rating, it said.

With regard to the ceiling on the quantum of public deposits held by deposit-taking HFCs, it said the limit now stands reduced from 3 times to 1.5 times of net owned funds with immediate effect.

It has now been decided that all deposit-taking HFCs would maintain on an ongoing basis liquid assets to the extent of 15 per cent of the public deposits held by them in a phased manner, it said.

If their credit rating falls below the minimum investment grade, such HFCs will not renew existing deposits or take new deposits until they achieve an investment grade credit rating, according to the statement.

It stated that the limit on the quantity of public deposits held by deposit-taking HFCs has been reduced from 3 times to 1.5 times of net owned funds with immediate effect.

As per the statement, it has now been resolved that all deposit-taking HFCs will hold on an ongoing basis liquid assets equal to 15% of the public deposits held by them in a phased way.

The draft report further stated that if the above asset cover falls short of the responsibility on account of public deposits, the HFC concerned must notify the National Housing Bank.

HFCs are permitted to selectively issue co-branded credit cards with scheduled commercial banks without risk sharing, with previous Reserve Bank clearance, for an initial term of two years and a review afterward, according to the statement.

To meet certain emergent expenses, it said 'tiny deposits' may be prematurely paid to individual depositors at the depositor's request, before the expiry of three months from the date of acceptance of such deposits, in entirety, without interest, subject to the satisfaction of the NBFC concerned.

In the case of other public deposits, the circular stated that not more than 50% of the deposit's principal sum or Rs 5 lakh, whichever is less, may be prematurely paid to individual depositors at their request, before the expiry of three months from the date of acceptance of such deposits, without interest.

The remaining sum, with interest at the stipulated rate, will be governed by the terms of the current instructions for public deposits, it noted.

Premature withdrawal would be permitted in the case of paying urgent needs, such as medical emergency or expenses incurred as a result of natural disasters.

Following the transfer of HFC regulation from the National Housing Bank (NHB), the Reserve Bank issued a revised regulatory framework for HFCs circular dated October 22, 2020, stating that further harmonisation between HFC and NBFC regulations will be undertaken in stages.