RBI Discussion Paper Suggests Bank-Like Regulation For Top 25-30 NBFCs
The Reserve Bank of India is suggesting an overhaul of regulations governing the country’s large and wide-ranging non-bank lending segment. The largest 25-30 non-banking finance companies will be subjected to bank-like regulation and capital requirements.
The recommendations come after a period of turbulence for non-banking financial companies. In November 2020, the RBI hinted at upcoming changes. A graded regulatory framework may be needed for India’s growing and diverse non-bank lending segment to strike a balance between the need to ensure financial stability while leaving enough flexibility for innovation, said Deputy Governor Rajeshwar Rao.
The Four Categories Of NBFCs
In a discussion paper the regulator recommended that non-banking finance companies be split into four categories, depending on their size and systemic relevance for better regulation.
The four categories include — base layer (NBFC-BL), middle layer (NBFC-ML), upper layer (NBFC-UL) and the top layer.
- NBFC-BL: These will be NBFCs with an asset size of up to Rs 1,000 crore. The largest share of NBFCs will fall in this category. According to the RBI discussion paper, 9209 out of 9425 non deposit taking NBFCs fall into this category. These non-bank lenders will have the least stringent regulation.
- NBFC-ML: This category will include all non-deposit taking NBFCs classified currently as 'systemically important' and all deposit taking NBFCs. Based on the discussion paper, it will see the least disruption in terms of regulatory changes.
- NBFC-UL: This layer will be made up of the top 25 to 30 NBFCs identified as systemically significant. This is the category where regulation will move towards what is followed in the case of banks.
- Top Layer: This layer will be empty for now and will populated with NBFCs where the RBI may see elevated systemic risk.
‘Upper Layer’ To See Maximum Change
The Upper Layer of NBFCs, which, according to the discussion paper will include about 25-30 NBFCs, will be subject to bank-like regulation.
Proposed changes for NBFC-ULs include:
- The concept of Core Equity Tier-1 will be introduced for this category and is proposed to be set at 9%.
- Suitable ceiling for leverage will be prescribed for these entities.
- Differential standard asset provisioning on lines of banks will be prescribed. At present NBFCs maintain standard asset provisioning of 0.4%. But, in the case of banks, standard asset provisioning differs for high risk categories such as real estate.
- The large exposure framework, as applicable to banks, can be extended with suitable adaptation for these NBFCs.
- Such NBFCs should be subject to mandatory listing requirement.
The ‘top layer’ will is currently empty is recommended as a category which will include any non-bank lenders seen to pose a risk. This would be akin to the ‘prompt corrective action’ category used for banks.
“Ideally, this top layer of the pyramid will remain empty unless supervisors take a view on specific NBFCs. In other words, if certain NBFCs lying in the upper layer are seen to pose extreme risks as per supervisory judgement, they can be put to significantly higher and bespoke regulatory/ supervisory requirements,” the discussion paper said.
‘Mid Layer’ To See Tighter Governance
NBFCs-ML will comprise of those that currently fall in the ‘systemically important’ category along with deposit-taking non-bank lenders. Housing Finance Companies, Infrastructure Finance Companies, Infrastructure Debt Funds, Core Investment Companies and Standalone Primary Dealers will also fall into this category.
- No changes proposed in the capital-to-risk-assets ratio (CRAR) of 15% with minimum Tier-I ratio of 10%.
- Lending and investment can be merged into a single exposure limit of 25% for single borrower and 40% for group of borrowers anchored to the NBFC’s Tier 1 capital.
- This category will also be subject to tighter corporate governance norms.
Certain regulatory restrictions on lending will be introduced for mid layer and upper layer NBFCs. For instance, these NBFCs cannot provide loans to companies for buy-back of shares/securities. IPO financing by NBFCs will be subject to a ceiling of Rs 1 crore per individual for any NBFC. Further, a sub-limit within the commercial real estate exposure ceiling should be fixed internally for financing land acquisition.
‘Base Layer’ To See Higher Net-Owned-Funds Requirement
This layer will include the large number of small NBFCs in the country and will subject to the least regulation since they have limited impact on systemic stability. This will also prevent a stifling of innovation from within the NBFC sector.
The proposals for this set of NBFCs includes:
- Entry-level “net owned funds” requirement to be raised to Rs 20 crore from Rs 2 crore; existing entities to be given time of five years to comply.
- NPA classification norm of 180 days will be harmonized to 90 days.
- Disclosure requirements will be widened by including disclosures on types of exposure, related party transactions, customer complaints.
The RBI has sought comments on the discussion paper within a month.