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JC - Legal Updates - Bridging the gap: Harmonizing NBFC and HFC regulations

Legal Updates

16 Jan 2024

Bridging the gap: Harmonizing NBFC and HFC regulations

Brief Overview:
The RBI has issued a draft circular titled ‘Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs’ for comments on 15th January 2024 ("Draft Circular").
Technical Details:
Key details of the Draft Circular are:
1)  Liquidity requirement: HFCs (deposit taking) to maintain 15% of liquid assets against public deposits held by them by 31st March 2025, in a phased manner.
2)  Ceiling on quantum of deposits: HFCs (deposit taking) to only hold public deposits up to 1.5 times of net owned funds.
3)  Repayment of deposits: The public deposits accepted or renewed by HFCs (deposit taking) to be repayable after 12 months or more but not later than 60 months.
4) Unquoted shares: HFCs (deposit taking) to set board-approved internal limits for investing in unquoted shares of non-affiliated companies. These limits must be within the overall caps for capital market exposure already in place.
5)  Hedging: HFCs shall also be allowed to hedge their risk arising out of their operations.
6)  Diversification of activities: HFCs shall be allowed to diversify their activities into certain fee-based activities without risk participation.
7)  Issuance of co-branded credit cards: HFCs shall be allowed selectively to issue co-branded credit cards with scheduled commercial banks, without risk sharing, with prior approval of the RBI, for an initial period of 2 years and a review thereafter.
In addition to the above, the Draft Circular, inter alia, proposes other regulations such as Safe Custody of Liquid Assets, full cover for public deposits, branches and appointment of agents to collect deposits, etc., as applicable to NBFCs, shall also be applicable to the relevant HFCs.
JC Takeaways:
This might signify an additional step in the RBI's endeavour to synchronize the regulations overseeing HFCs and NBFCs. How this will impact existing business operations of the concerned stakeholders is to be assessed upon finalisation of the Draft Circular.
For further details, please see:
Review of regulatory framework for HFCs and harmonisation of regulations applicable to HFCs and NBFCs
For any queries / clarifications, please feel free to ping us and we will be happy to chat:

●   Mr. Ankit Sinha (ankit.sinha@jclex.com)
●   Ms. Rupul Jhanjee (rupul.jhanjee@jclex.com