RBI Tightens Rules for Non-Banking Lenders; Announces Big Regulatory Changes

The Reserve Bank of India (RBI) has announced a series of regulatory reforms for non-banking lenders by altering the October 2021 circulars on Scale-Based Regulation, which puts large NBFCs (Non-Bank Financial Institutions) on par with banks in terms of credit risk.

The Reserve Bank of India issued four circulars on Tuesday: Large Exposure Framework for NBFCs – Upper Layer; Disclosures in Financial Statements; Scale-Based Regulation for Capital Requirements – Upper Layer; and regulatory restrictions on their loans and advances.

The regulator stated that the goal of the Significant Exposure Framework with Upper Layer is to manage credit risk in NBFCs and identify large exposures, refine requirements for groups of related counterparties, and establish large-scale reporting norms.

According to the regulator, an NBFC’s total exposure to a single counterparty cannot exceed 20% of its available eligible capital base at any moment. However, the Board may authorise an extra 5% exposure above and beyond 20%, but not more than 25% of the qualifying capital base.

Additional 5% exposure will be permitted only if the NBFC has a board-approved policy stipulating the conditions under which exposures above 20% can be considered; and if the NBFC notifies the RBI in writing of the extraordinary reasons for which exposure exceeding 20% is permitted in a particular case.

However, the new regulations allow an NBFC to finance infrastructure that exceeds the exposure limit of more than 5% of its Tier I capital to a single counterparty, i.e. 30% of Tier I capital, and if the additional exposure is to infrastructure, it can go up to 35% if the structure is due to debt and/or investment.