India’s non-bank lenders, which have been struggling with tight liquidity conditions in the credit markets, may see reduced interest from public depositors after Dewan Housing Finance Ltd. restricted premature withdrawals from its fixed deposit schemes.
DHFL’s decision may also prove to be a set-back for the industry, which has been arguing that regulators need to grant deposit-licences to a larger number of non-bank lenders and housing finance companies.
On Tuesday, DHFL informed depositors and distributors that it will stop taking fresh deposits. The firms also halted premature withdrawals from existing deposit schemes, except in case of emergencies. The announcement came against the backdrop of tight liquidity conditions being faced by the company.
DHFL is one of 18 HFCs that are allowed to accept public deposits, according to information available on the National Housing Bank’s website. These HFCs together held about Rs 1.22 lakh crore in public deposits as of March 2018, shows data from the Reserve Bank of India’s ‘Trends and Progress In Banking’ report for 2018.
Apart from these HFCs, 89 non-banking financial companies had a licence to accept public deposits, shows data available on the RBI’s website. These NBFCs held Rs 31,900 crore in deposits.
In recent years, the RBI has stopped granting deposit licences to non-bank lenders. As such, most NBFCs and HFCs who hold such deposit licences are legacy institutions.
How Will Depositors Respond?
DHFL’s decision to halt premature withdrawals could hurt interest in fixed deposit schemes of NBFCs and HFCs, said financial planners that BloombergQuint spoke to.
The development will obviously have implications and lead to heightened nervousness among investors, said Pankaj Mathpal, chief executive officer of Optima Money Managers.
Retail investors choose fixed deposits on account of safety and fixed returns, he said. While the decision to not accept new deposits is justified, halting premature withdrawals of existing deposits is problemtic, he said.
Shalini Dhawan, co-founder of Plan Ahead Wealth Advisors, said that fixed deposit schemes offered by non-bank lenders can be quite popular since they offer interest rates higher than banks. However, the narrative has now changed to capital protection rather than returns.
Vijay Mantri, co-promoter of Buckfast Financial Advisory Services, shared that view.
Today, the flight is towards safety rather than being very adventurous. If you invest in a bank FD, that may offer you seven percent and these FDs may offer you 8/9/10 percent. People are saying that I would rather be safe than venture into these FDs. More money is flowing towards quality HFCs and quality NBFCs and into bank deposits rather than any of the (troublesome) names which have circulated in the market.Vijai Mantri, Co-Promoter, Buckfast Financial Advisory Services Pvt. Ltd.
Kalpesh Thaker, founder of Jishnu World Wealth Managers, however, believed the incremental impact of DHFL’s decision will be limited as investors and depositors were already cautious following the defaults by Infrastructure Leasing and Financial Services.
Regulations Governing NBFC/HFC Deposits
Deposits with NBFCs and HFCs are governed by regulations issued by the Reserve Bank of India and the National Housing Bank respectively. The rules and protections governing these deposits are different from those that govern bank deposits.
NBFCs and HFCs can only take fixed deposits and not demand deposits, such as those held by banks in current accounts and savings accounts.
Only those NBFCs and HFCs which have a minimum investment grade rating can accept fixed deposits.
The quantum of deposits that an NBFC can take is linked to its ‘net owned funds’ and is set at one-and-a-half times. In the case of HFCs, the total quantum of deposits can go up to five times the ‘net owned funds’.
According to the RBI’s definition, ‘net owned funds’ will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets.
Fixed deposits with HFCs and NBFCs are not guaranteed. This is unlike scheduled commercial banks, where deposits up to Rs 1 lakh are guaranteed by the Deposit Insurance and Credit Guarantee Corp.
“The lack of deposit guarantee and the sheer number of NBFCs have meant that the RBI is cautious about giving out deposit licences to non-bank lenders,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services. “The current series of events are a validation of the regulator’s stand.”
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