RBI's new guidelines on investment applicable from January 1

The Reserve Bank of India (RBI) has issued a new circular revising the regulatory framework for investing in Housing Finance Companies(HFC) and Non-Banking Finance Companies(NBFC). The revised regulations shall be applicable with effect from January 1 next year.

“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,” the RBI circular said.

“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,” the circular added.

An important revision is the hike in minimum liquid asset requirement for deposit-taking HFCs. This has been increased to 15 per cent of public deposits from the earlier limit of 13 per cent. The RBI also made it compulsory for public deposits to have a maturity period of 12 months in the least or 60 months at most.

The new revision by the RBI also mandates HFCs to make sure there is full asset coverage for public deposits and an investment grade rating from the credit rating agencies. Home lenders “shall not renew existing deposits or accept fresh deposits thereafter till they obtain an investment grade credit rating”, the circular said.

Small deposits valued at Rs 10,000 or less can be paid prematurely to depositors, subject to conditions. For other deposits, individuals can prematurely seek withdrawal up to 50 per cent of the principal amount or Rs 5 lakh, whichever is lower, without interest and within three months of deposit acceptance.

Updating the nomination process, the RBI has asked NBFCs to set up a proper procedure for acknowledging forms for nomination as well as cancellation or modification of nomination. Such acknowledgment has to be provided to all customers. The status of nomination has to be indicated on passbooks or receipts by the NBFCs with the words “Nomination Registered”.

The RBI circular outlines that in case of critical illness, a depositor can request for a premature payment of 100 per cent of the principal amount deposited, without accruing interest and before the three-month expiry date. This provision applies to existing deposit agreements, too.

An expense that is an outcome of a medical emergency or a natural disaster declared by the government will also be covered. This is also applicable to current deposit contracts where the depositor cannot withdraw the deposit prematurely within three months.

On maturity, the RBI mandates that the NBFC should notify a depositor at least a fortnight in advance instead of the earlier time frame of two months in advance.