RBI further tightens regulations for non-bank lenders

By revising the October 2021 circulars on scale-based norms, the Reserve Bank of India (RBI) has announced a series of regulatory changes for non-banking lenders, bringing major NBFCs practically on par with bankers when it comes to managing their credit risk concentration. On Tuesday, the regulator issued four circulars: Regulatory limits on their loans and advances; Disclosures in their financial statements; Scale-based regulation for capital needs - higher layer; and Large exposures framework for NBFCs. These are enhancements to the circulars issued on October 22, 2021.

The regulator stated that the upper layer's large exposure framework is targeted at tackling credit risk concentration in NBFCs and is designed to detect significant exposures, refine the criteria for grouping linked counterparties, and establish reporting rules for large exposures.

According to the regulator, an NBFC's total exposure value to a single counterparty cannot exceed 20% of its available eligible capital base at any moment.  However, if the NBFC has a board-approved policy setting out conditions under which over 20% exposure may be considered; and if it informs the RBI in writing the exceptional reasons for which exposure beyond 20% is being allowed in a specific case, the board can allow an additional 5% exposure beyond 20% but no more than 25% of its eligible capital base.

However, the new regulations allow an NBFC involved in infrastructure finance to exceed the exposure limit to a single counterparty by 5% of its tier I capital - or 30% of its tier I capital - if the additional exposure is for infrastructure loans and/or investments, in which case it can go up to 35%.

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