RBI withdraws concentration-risk exemptions for govt-owned NBFCs

The revised framework mandates annual identification of Upper Layer NBFCs and brings government-owned entities under the same exposure norms as their regulatory peers

Revising the final norms for the registration of and exemptions to non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) on Wednesday mandated that NBFCs with an asset size of ₹1 trillion and above, based on their latest audited balance sheet, will be classified as upper-layer entities, and would hence be subjected to enhanced regulatory oversight. The directions come into force with immediate effect.

 

The RBI said these entities will be identified annually for scale-based regulation, while the asset-size threshold for classification will be reviewed every three years. 

 

However, the norms were silent on the definition of indirect receipt of public funds, which, in an April direction, were referred to funds received not directly but through associates and group entities, which have access to public funds. This provision was seen as a hurdle for business houses that were keen to deregister as core investment company (CIC), hence avoiding public listing.

 

Today’s norms also tightened concentration risk norms for government-owned NBFCs by withdrawing the exemptions previously available to them and bringing them under the same exposure framework applicable to their respective regulatory layers.

 

Under the revised norms, government-owned NBFCs will have to adhere to concentration limits based on whether they are classified in the middle layer or upper layer under the scale-based regulation (SBR) framework. Existing breaches of exposure limits will be allowed to run off until maturity, although fresh exposures to such obligors will not be permitted.

 

"The final guidelines are largely in line with the draft framework. The key proposals around the classification of NBFCs with assets of ₹1 trillion and above as upper-layer entities, as well as the treatment of bank-owned NBFCs, remain unchanged,” said an analyst with a rating agency.

 

“The RBI seems to have tightened these requirements by withdrawing certain exemptions that were available to government-owned entities and bringing them under the same exposure framework applicable to their respective regulatory layers,” the person said, and added, “Beyond that, the framework is broadly consistent with what was proposed in the draft.”

 

The RBI has also introduced a new set of guidelines for NBFCs that are group entities of scheduled commercial banks. Such entities will be required to comply with norms on commercial banks in cases where both the NBFC and its parent bank undertake the same financial activity.

 

At the same time, these requirements will apply irrespective of an NBFC’s classification under the SBR framework. However, such entities will continue to retain their existing layer classification.

 

For instance, an infrastructure debt fund-NBFC (IDF-NBFC) that is part of a banking group will continue to remain in the middle layer under the SBR framework, but it will be required to comply with regulations applicable to upper layer NBFCs, except for the listing requirement, where the same activity is undertaken by both the NBFC and its parent bank.

 

Separately, the RBI eased certain exposure norms for Infrastructure Finance Companies (IFCs). It said exposures backed by state government guarantees would be treated as exposures to the guaranteeing state government and exempted from prudential exposure limits, subject to a 20 per cent risk weight. Further, the central bank raised the exposure limit for a group of connected counterparties for NBFC-IFCs to 45 per cent and allowed IFCs to exceed the prescribed exposure limit by up to 20 per cent of their Tier-I capital for such exposures.