RBI Boosts Vigilance With Four-Tier Regulatory Framework For NBFC, Real Estate News, ET RealEstate


MUMBAI: The Reserve Bank of India (RBI) will put in place a four-tier regulatory structure for non-bank financial corporations to more closely monitor shadow banking and minimize risks to the entire financial system.

The detailed set of standards, which will come into effect from October 2022, provide for a scale-based regulatory framework (SBR) that takes into account capital requirements, governance standards, prudential regulation and other aspects of non-bank financial corporations (NBFC). .

The central bank’s latest move, after extensive consultations with stakeholders, also comes against the backdrop of past events, including the collapse of IL & FS in 2018 and later DHFL, which had an impact on training on the entire financial system, particularly in terms of liquidity problems. Since then, the focus has shifted to more stringent regulations rather than a light approach for the country’s shadow banking sector.

Unveiling the four-tier framework, RBI said on Friday that over the years, the NBFC industry has undergone tremendous evolution in terms of size, complexity and interconnection within the financial sector.

Many entities have grown and become systemically important, and there is therefore a need to align the regulatory framework of NBFCs taking into account the evolution of their risk profile, he said in a statement.

To begin with, the central bank will publish an integrated regulatory framework for NBFCs, offering a holistic view of the structure of the SBR, a set of new regulations being introduced and the respective timelines.

NBFCs will be divided into four layers: the base layer (BL), the middle layer (ML), the top layer (UL) and the top layer (TL).

The base layer will include NBFCs currently classified as Non-Systemically Important NBFC (NBFC-non-deposits), in addition to Type I NBFCs, non-operational financial holding, NBFC-P2P (Peer to Peer Lending Platform). ) and NBFC-AA (Account aggregator). The asset size threshold for this layer will be less than Rs 1,000 crore.

Currently, the systemic importance threshold is Rs 500 crore.

The middle layer will include all deposit-free NBFCs currently classified as NBFC-ND-SI (company without deposit – systematically large) with an asset size greater than Rs 1,000 crore and all NBFCs accepting deposits, regardless of their size. .

The upper layer will include NBFCs which are specifically identified by the Reserve Bank as warranting an enhanced regulatory requirement based on a set of parameters.

The top ten eligible NBFCs in terms of asset size will always reside in the top layer, regardless of any other factor, RBI said.

“The top layer will ideally remain empty. This layer can be populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk of specific NBFCs in the top layer. These NBFCs should move to the top layer. of the top layer, ”he noted.

The regulatory minimum net fund (NOF) for NBFC-Investment and Credit Companies (ICC), NBFC Micro Finance Institution (MFI) and NBFC-Factors would be increased to Rs 10 crore and a trajectory has been drawn to meet this requirement.

However, for NBFC-P2P, NBFC-AA and NBFC without public funds and without client interface, the NOF will continue to be Rs 2 crore.

The current NPA classification standard has been replaced by the over 90 day delay period for all NBFC categories. A descent path is provided to NBFCs in the base layer to adhere to the 90-day NPA standard, the statement said.

In order to improve the quality of regulatory capital, RBI said that NBFC-UL would maintain basic Tier 1 capital of at least 9% of risk-weighted assets, while it would be required to hold a differential provisioning for different categories of standard assets.

In addition to CRAR, NBFC-UL will also be subject to a financial leverage requirement to ensure that its growth is supported by adequate capital, among other factors. An appropriate leverage limit will be prescribed for these entities at a later date as necessary.

According to RBI, housing finance companies would continue to follow specific regulations on exposure to sensitive sectors, as they currently apply.

There will be a ceiling of Rs 1 crore per borrower for the financing of the subscription to the initial public offering (IPO). NBFCs can set more conservative limits, RBI said.

In addition, the central bank has set a significant exposure limit for all counterparties and groups of related counterparties as well as for capital market and commercial real estate.

To strengthen corporate governance, he suggested including independent directors on the board, among other requirements.

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