RBI’s draft directive for housing finance companies

In 2020, with the commencement of the transfer of the regulation of housing finance companies (HFC) from the National Housing Bank (NHB) to the Reserve Bank of India (RBI), the RBI began introducing various processes to bring about the harmonisation of regulations between HFCs and non-banking financial companies (NBFC) in “a phased manner”. The first such integration directive was issued in October 2020. Based on its review of the current regulatory framework that applies to NBFCs and the specialised nature of HFCs, the RBI published a draft directive in January 2024 for the further alignment of regulations governing each set of entities. As an overview, the draft directive seeks to reduce the divergence between the regulations for NBFCs and HFCs, but does not eliminate it because of the specialised position of HFCs as lenders to the housing sector.

At present, HFCs can accept public deposits for a period longer than one year, but not exceeding 10 years. The draft directive proposes to reduce the maximum of such tenure to five years. The regulations applying to NBFCs for the opening of branches and the appointment of agents to collect deposits will be extended to HFCs. To align further with NBFCs, the draft directive seeks to improve access for HFCs to the derivatives markets to hedge their risks. Subject to compliance with prescribed requirements, HFCs will be allowed to participate in currency futures, currency options, interest rate futures and credit default swaps.

The draft directive requires that HFCs finalise their balance sheets within three months from the end of March each year. A HFC will need the prior approval of the NHB before applying to the registrar of companies if it wishes to extend the date of submission of its balance sheet in accordance with the timeline prescribed under the Companies Act, 2013. In such a case, the HFC will have to submit a proforma balance sheet to the NHB. The draft directive notes that an investment by a HFC in another HFC in excess of a prescribed threshold would lead to an equivalent reduction from the regulatory capital required to be held by the investing HFC. The draft directive would deduct from required regulatory capital any investments made by HFCs in group entities through alternative investment funds (AIFs) where 50% of the funds of the AIF have been provided by the HFC or where the beneficial owner of the AIF is the HFC. In addition, the draft directive requires HFCs to have in place board-approved limits for investments in “unquoted shares”, that is unlisted shares, of a company which is neither a subsidiary nor a group company. The draft further prescribes that in calculating such a ceiling, all investments in unquoted shares shall be taken into account.

While the alignment of regulations is a good objective in itself, the RBI’s draft circular also contains the subtext of more nuanced regulations to come, either to curtail or to prevent any practices that deviate from acceptable conduct. For instance, the proposed regulations on investments by AIFs are an implicit recognition by the RBI that it believes its regulations on investments could have been circumvented through the use of investment conduits. An astute industry observer might also deduce that these proposals are but a precursor to a later and broader alignment by the RBI with rules already in force on investments in AIFs by banks.

It could be said that the pattern of recent regulatory moves by the RBI reflects a watchful regulator, methodical in its survey of industry practices and apparently responding harshly to trends with which it is not entirely comfortable. There are reports in the public domain that the Ministry of Finance is generally supportive of the approach of the RBI and other financial sector regulators. It also seems that the RBI and other financial sector regulators have met industry groups to allay any concerns they may have. From a rule-making perspective, prescriptive rather than principle-based regulations are not conducive for either the regulators or the regulated.

As the RBI has introduced frameworks for industry-level, self-regulatory organisations, it may be a signal that the financial sector should proactively engage with the RBI and other financial sector regulators to dispel any fears they may have.

Sawant Singh and Aditya Bhargava are partners at Phoenix Legal.