MUMBAI: The Reserve Bank of India (RBI) will set up a four-tier regulatory framework for non-banking financial companies to closely monitor the shadow banking sector and mitigate risks to the overall financial system.
The detailed set of norms, which will come into effect from October 2022, provides for a Scale Based Regulation (SBR) framework that takes into account capital requirements, governance standards, prudential regulation and other aspects of Non-Banking Financial Companies (NBFCs). .
The central bank’s latest move, after extensive stakeholder consultations, also comes against the backdrop of past instances, including the collapse of IL&FS in 2018 and later DHFL, which had an impact on the entire financial system, especially in the wake of the liquidity crisis. In context.
Since then, the focus has shifted to stricter regulations rather than a light touch approach to the country’s shadow banking sector.
Unveiling the four-tier framework, the RBI on Friday said that over the past few years, the NBFC sector has grown significantly in terms of size, complexity and interconnectedness within the financial sector.
A number of entities have evolved and become systemically important, and hence there is a need for NBFCs to align the regulatory framework keeping in mind their changing risk profiles, a statement said.
To begin with, the central bank will issue a unified regulatory framework for NBFCs, providing a holistic view of the SBR structure, new set of rules and related timelines.
NBFCs will be divided into four layers – Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and Top Layer (TL).
The base layer will include NBFCs currently classified as non-systemically important NBFCs (NBFC-non-deposit taking), in addition to Type I NBFCs, non-operative financial holding companies, NBFCs-P2P (peer to peer). Lending Platform) and NBFC-AA (Account Aggregator).
The asset size limit for this layer will be less than Rs 1,000 crore.
At present, the limit of systemic importance is Rs 500 crore.
The middle layer would include all non-deposit taking NBFCs, which are currently classified as NBFC-ND-SI (Non-deposit taking company-systemically important) having asset size of more than Rs 1,000 crore and all deposit accepting NBFCs irrespective of size.
The upper layer would include those NBFCs that are specifically identified by the Reserve Bank as having increased regulatory requirement based on a set of parameters.
RBI said that the top ten eligible NBFCs will always be in the top layer in terms of their asset size, irrespective of any other factor.
“The top layer would ideally be empty. This layer may be populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the upper layer. Such NBFCs will move from the top layer to the top layer, “It noted.
The regulatory minimum Net Owned Fund (NOF) for NBFC-Investment and Credit Companies (ICCs), NBFC Micro Finance Institutions (MFIs) and NBFC-Factors will be increased to Rs 10 crore and a glide path has been prepared to meet this requirement. has been done.
However, for NBFC-P2P, NBFC-AA and NBFCs with no public funds and no customer interface, the NOF will remain Rs 2 crore.
The existing NPA classification norms for all categories of NBFCs have been changed to overdue periods of more than 90 days.
A glide path has been provided to the NBFCs in the base layer to comply with the NPA norm of 90 days, the statement said.
To enhance regulatory capital quality, RBI said NBFC-ULs shall maintain common equity Tier 1 capital of at least 9 per cent of risk-weighted assets, while they will be required to make separate provisions for different classes of standard assets .
In addition to CRAR, NBFC-ULs will be subject to leverage requirement to ensure that their growth is supported by adequate capital, among other factors.
An appropriate threshold for leverage for these entities will be determined later, if required.
According to RBI, housing finance companies will continue to adhere to specific regulation on risk sensitive sector, as is currently in force.
There will be a limit of Rs 1 crore per borrower for financing the initial public offering (IPO) subscription.
RBI said NBFCs can set more conservative limits.
In addition, the central bank has outlined large exposure limits for all counterparties and groups of affiliated counterparties and for capital markets and commercial real estate.
In order to strengthen corporate governance, it has suggested the inclusion of independent directors on the board, among other requirements.