RBI Introduces Scale-Based Regulation For NBFCs
The Reserve Bank of India on Friday announced its new scale-based regulations for the non-banking finance companies sector. The new guidelines will be applicable from October 2022.
"Many entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile," the RBI said.
The final guidelines follow a discussion paper introduced by the regulator in January.
According to the guidelines, NBFCs will be split into four layers depending on their size, activity and perceived riskiness, to determine scale-based regulation. These layers include:
Base Layer: This includes NBFCs with an asset size below Rs 1,000 crore. It will also include peer-to-peer lending platforms, account aggregators, non-operative financial holding companies and NBFCs not accessing public funds nor having any public interface.
Middle Layer: It consists of all deposit-taking and non-deposit taking NBFCs with an asset size of Rs 1,000 crore and above, standalone primary dealers, infrastructure debt fund NBFCs, core investment companies, housing finance companies and infrastructure finance companies.
Upper Layer: This shall comprise of NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology. The top 10 eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
Top Layer: This layer will remain empty, the regulator said. NBFCs in the upper layer may be moved to the top layer if the potential systemic risk from specific companies rises, according to the RBI's assessment.
Regulatory Changes For Upper Layer
The top 10 NBFCs will automatically fall into the upper layer.
NBFCs in the Upper Layer must maintain a minimum common equity tier-1 capital of 9% of risk weighted assets
To be subjected to leverage requirement to ensure that growth is supported by adequate capital. Suitable ceiling for leverage will be prescribed subsequently.
Upper Layer NBFCs shall be required to hold differential provisioning towards different classes of standard assets.
These NBFCs will have to also follow the large exposure framework of the RBI.
Large exposure of an NBFC to all counterparties and groups of connected counterparties will be considered for exposure ceilings.
The RBI has also prescribed an internal limit for exposure toward other NBFCs.
Apart from the top 10 NBFCs which will automatically fall into this layer, the top 50 non-bank lenders will be assessed to see whether they should be subject to these tougher rules. For this purpose, the RBI has laid down a set of qualitative and quantitative criteria.
Base Layer And Middle Layer NBFCs
NBFCs in the base layer shall be subject to regulations as currently applicable to non-deposit-taking NBFCs.
NBFCs in the middle layer shall continue to follow regulations as currently applicable for non-deposit-taking systemically important NBFCs.
Move Towards 90-Day NPA Recognition
The regulator has also introduced a glide path for a minimum number of days before an account is recognised as a non-performing asset. This is now applicable for all NBFCs, listed and unlisted.
NBFCs must move to a 150-day NPA recognition norm by March 31, 2024
NPA recognition at 120 days of overdue must be achieved by March 31, 2025
NBFCs must follow 90-day NPA recognition cycle by March 31, 2026.
NBFCs are also required to make a thorough internal assessment of the need for capital, commensurate with the risks in their business, along the same lines as commercial banks.
The methodology for internal assessment of capital shall be proportionate to the scale and complexity of operations as per board approved policies of the NBFC.
NBFCs must follow a uniform exposure limit of 25% and 40% of Tier-1 capital for single borrower and group borrowers, respectively.
Stricter Rules For Some
Certain categories of NBFCs will see high net owned fund requirements.
For investment and credit companies, microfinance companies and NBFC-Factors, the minimum net owned funds must be raised to Rs 10 crore by March 31, 2027, the RBI said.