Aligning Regulations: Harmonizing the Frameworks for HFCs and NBFCs
Team Finserv (finserv@vinodkothari.com)
Vide notification dated August 12, 2024, RBI has amended certain regulations applicable to Housing Finance Companies, and NBFCs to enure harmonization between HFC Master Directions and SBR Master Directions. These amendments shall be effective from January 01, 2025. The following table contains a snapshot of the changes from all HFCs and NBFCs1:
| Sr. | Particulars | Erstwhile provision | Amended / Harmonised provision |
|---|---|---|---|
| Changes in HFC Master Directions for all HFCs | |||
| 1 | Participation in exchange-traded currency derivatives | HFCs were allowed to participate in currency futures and options however no regulatory guidelines were prescribed for the same. | All HFCs can now participate in currency futures exchanges and Non-deposit HFCs with asset size of ₹1000 crore and above can participate in currency option exchanges, subject to the guidelines issued in the matter by the Foreign Exchange Department of the Reserve Bank and necessary disclosures in the balance sheet in accordance with guidelines issued by SEBI. |
| 3 | Participation in Interest Rate Futures | HFCs were allowed to participate in interest rate futures however no regulatory guidelines were prescribed for the same. | All HFCs can now participate in interest rate futures exchanges as clients and Non-deposit HFCs with asset size of ₹1000 crore and above are permitted to participate in interest rate futures market as trading members, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 dated June 26, 2019, as amended from time to time. |
| 4 | Credit Default Swaps (CDS) | HFCs were allowed to participate in the CDS market however no regulatory guidelines were prescribed for the same. | HFCs will now be permitted to participate in the CDS market as users only and they may buy credit protection only to hedge their credit risk on corporate bonds they hold. HFCs cannot enter into short positions in CDS contracts. HFCs shall be required to comply with Annex XIV of SBR Directions while participating in CDS market as users. |
| 5 | Issue of co-branded credit cards | HFCs were not allowed to issue co-branded cards under the erstwhile directions. | HFCs are now allowed to issue co-branded credit cards, subject to the instructions prescribed in Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022, as amended from time to time. |
| 6 | Accounting Year | Every HFC shall prepare its financial statements for the year ending on the 31st day of March. | HFCs must finalize their balance sheets within 3 months from the relevant date. If an HFC wishes to extend this period under the Companies Act, it must first obtain approval from NHB before seeking an extension from the RoC. In cases where NHB and RoC grants extension of time, the HFC shall furnish to NHB a proforma balance sheet(unaudited) as on March 31 of the year and the returns due on the said date. |
| 7 | Periodicity of IS Audit | The Audit Committee must ensure that an Information System Audit of the critical and significant internal systems and processes is conducted at least once in two years to assess operational risks faced by the HFC. | HFCs can now decide the periodicity of IS Audit as per its policy in accordance with IT Governance Directions. However, a continuous auditing approach for critical systems shall be undertaken. |
| 8 | Investment through Alternative Investment Funds for calculation of NOF | No regulatory guidelines were prescribed | To determine the Net Owned Funds (NOF) of a Housing Finance Company (HFC), investments or loans to subsidiaries, group companies, and other HFCs exceeding 10% of owned funds are deducted from the owned funds. Investments made by an HFC in group entities, either directly or indirectly through an AIF (if 50% or more of the AIF’s funds come from the HFC) or an AIF trust (if the HFC is the beneficial owner and 50% of the trust’s funds come from the HFC), shall be treated similarly. |
| 9 | Technical Specifications for all participants of Account Aggregator ecosystem | Regulatory provisions did not exist | HFCs acting either as ‘Financial Information Provider’ or ‘Financial Information User’ are expected to adopt the technical specifications published by ReBIT, as updated from time to time. |
| Changes in SBR Directions for all NBFCs | |||
| 7 | Periodicity of IS Audit | The Audit Committee must ensure that an Information System Audit of the critical and significant internal systems and processes is conducted at least once in two years to assess operational risks faced by the NBFCs. | NBFCs can now decide the periodicity of IS Audit as per its policy in accordance with IT Governance Directions. Further, a continuous auditing approach for critical systems shall be undertaken. |
- The changes specifically for deposit taking HFCs and NBFCs have note been covered ↩︎
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