The Reserve Bank of India has in a recent circular capped the maximum permissible exposure of a non-banking finance company (NDFC) to a single entity. The circular issued April 19 said that the exposure of an NBFC to a single entity should not cross 20 per cent of its available capital base. But if the board of the said NBFC approves, then additional 5 per cent exposure may be allowed.
These norms will come into effect from October 1, 2022.
For a group of connected NBFC entities, the aggregate exposure shall not exceed 25 per cent of the capital base. For infrastructure finance companies, the aggregate limit will be 30 per cent of the total available capital for a single NBFC, while for a connected group of NBFCs, this limit will be 35 per cent of the available capital.
To Which NBFCs Are These Guidelines Applicable?
NBFCs will be classified into four categories, i.e., base, middle, upper, and top layers. However, these new regulations apply to NBFCs in the middle and upper layers. The upper layer of NBFCs include those that the RBI are yet to identify; while the middle layer of NBFCs are those which have an asset of Rs 1,000 crore or more, including deposit-taking and non-deposit taking NBFCs.
What Happens When The Limits Are Breached?
If the said capital lending limits are breached, then the respective NBFC will have to report to the specified department of supervision of the RBI, and it may be barred to undertake any further exposure both at the entity and group level, until the situation is rectified. In addition, any penalty or fine, if applicable, will also apply.
What Led To These Changes?
In October 2021, the RBI released a set of rules which classified NBFCs based on their capital size and risk undertaken. According to the RBI, the entire NBFC sector has grown far bigger than anticipated, both in terms of size and complexity. Also, over the years, NBFCs have become more interconnected with the financial sector. So, it is essential that the regulatory framework for NBFCs are systematically aligned, keeping in view the changed risk profile and increased size of them.
What Other Changes Were Made?
The RBI has asked NBFCs to report details of their bifurcation in asset classification and provisioning requirements in their annual financial statements if the said bifurcation breaches the threshold as specified.
The NBFCs will also have to disclose details of bifurcation if the RBI finds that the additional provisioning requirements have exceeded 5 per cent of the reported profit before tax and impairment loss on financial instruments for the particular period.
If the additional gross non-performing assets (NPA), as identified by the RBI exceeds 5 per cent of the reported gross NPAs for the particular period, then also a detailed disclosure will have to be given by the NBFC.
In addition, all NBFCs will now have to make additional disclosures in their notes to accounts in the balance sheet, and include details of their exposure to real estate, capital market, intragroup exposure, unhedged foreign currency exposure, agriculture and allied activities, industries, services, personal loans, and others, if applicable. These disclosure guidelines will be effective for annual financial statements from the financial year 2023 onwards.
Also, the RBI has said that if an NBFC lends to the real estate sector, then it should obtain prior clearances from the government or other statutory authorities for the project for availing these loans.