Converging NBFC (large) and Banking regulations
The Reserve Bank of India (RBI) introduced detailed notifications on restrictions on loans, advances and large exposures for Indian NBFCs in sync with the migration towards a scale based regulatory approach. These are aimed at minimising potential systemic risks in the development of a robust non bank intermediation channel within the Indian credit system.
Regulatory restrictions on loans and advances by NBFC:
- Applicability:
- NBFC Middle Layer (ML)
- All deposit taking NBFCs (NBFC-Ds), irrespective of asset size,
- Non-deposit taking NBFCs with asset size of ₹1000 crore and above
- NBFCs undertaking the following activities:
- Standalone Primary Dealers (SPDs)
- Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs)
- Core Investment Companies (CICs)
- Housing Finance Companies (HFCs)
- Infrastructure Finance Companies (NBFC-IFCs).
- NBFC – Upper Layer (UL)
- Top ten eligible NBFCs in terms of their asset size
- As deemed by RBI from time to time based on its evaluation of size, interconnectedness, leverage and other key metrics of a NBFC
- NBFC Middle Layer (ML)
- Restrictions on loans:
- Loans to directors (and companies where the director is employee, director, majority shareholder etc) beyond Rs 5 Crores need to be approved by board of directors/committee of directors. Not applicable for ‘loans and advances’ against –
- Government securities
- Life insurance policies
- Fixed deposits
- Stocks and shares
- For lending to own senior employees of the NBFC, the following criteria is required:
- Board needs to be informed about all such loans.
- A senior employee cannot exercise his/her influence to get loan sanctioned. Such sanctions need to be made by a higher sanctioning authority.
- Not applicable for ‘loans and advances’ against –
- Government securities
- Life insurance policies
- Fixed deposits
- Stocks and shares
- Housing loans, car advances, etc. granted to an employee of the NBFC under any scheme applicable generally to employees.
- All real estate loans to developers need to be disbursed after ensuring the project secures all required Governmental/statutory approvals.
- Loans to directors (and companies where the director is employee, director, majority shareholder etc) beyond Rs 5 Crores need to be approved by board of directors/committee of directors. Not applicable for ‘loans and advances’ against –
- Applicability:
- NBFC Middle Layer (ML)
- All deposit taking NBFCs (NBFC-Ds), irrespective of asset size,
- Non-deposit taking NBFCs with asset size of ₹1000 crore and above
- NBFCs undertaking the following activities:
- Standalone Primary Dealers (SPDs)
- Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs)
- Core Investment Companies (CICs)
- Housing Finance Companies (HFCs)
- Infrastructure Finance Companies (NBFC-IFCs).
- NBFC – Upper Layer (UL)
- Top ten eligible NBFCs in terms of their asset size
- As deemed by RBI from time to time based on its evaluation of size, interconnectedness, leverage and other key metrics of a NBFC
- NBFC Middle Layer (ML)
- Restrictions on loans:
- Loans to directors (and companies where the director is employee, director, majority shareholder etc) beyond Rs 5 Crores need to be approved by board of directors/committee of directors. Not applicable for ‘loans and advances’ against –
- Government securities
- Life insurance policies
- Fixed deposits
- Stocks and shares
- For lending to own senior employees of the NBFC, the following criteria is required:
- Board needs to be informed about all such loans.
- A senior employee cannot exercise his/her influence to get loan sanctioned. Such sanctions need to be made by a higher sanctioning authority.
- Not applicable for ‘loans and advances’ against –
- Government securities
- Life insurance policies
- Fixed deposits
- Stocks and shares
- Housing loans, car advances, etc. granted to an employee of the NBFC under any scheme applicable generally to employees.
- All real estate loans to developers need to be disbursed after ensuring the project secures all required Governmental/statutory approvals.
- Loans to directors (and companies where the director is employee, director, majority shareholder etc) beyond Rs 5 Crores need to be approved by board of directors/committee of directors. Not applicable for ‘loans and advances’ against –
Large exposure framework (LEF) restrictions
- Applicability:
- NBFC – Upper Layer (UL)
- Top ten eligible NBFCs in terms of their asset size
- As deemed by RBI from time to time based on its evaluation of size, interconnectedness, leverage and other key metrics of a NBFC.
- NBFC – Upper Layer (UL)
- Restriction on loans:
- Applicability:
- NBFC – Upper Layer (UL)
- Top ten eligible NBFCs in terms of their asset size
- As deemed by RBI from time to time based on its evaluation of size, interconnectedness, leverage and other key metrics of a NBFC.
- NBFC – Upper Layer (UL)
- Restriction on loans:
| NBFC Upper Layer (ex IFC) | NBFC Upper Layer IFC | |
|---|---|---|
| Single counterparty | 1. 20% 2. Additional 5% with Board approval 3. Additional 5% if exposure in infra (cannot club 1&2 and exceed 25% in any case) | 1. 25% 2. Additional 5% with Board approval |
| Connected companies | 1. 25% 2. Additional 10% if exposure in infra | 1. 25% |
| NBFC Upper Layer (ex IFC) | NBFC Upper Layer IFC | |
|---|---|---|
| Single counterparty | 1. 20% 2. Additional 5% with Board approval 3. Additional 5% if exposure in infra (cannot club 1&2 and exceed 25% in any case) | 1. 25% 2. Additional 5% with Board approval |
| Connected companies | 1. 25% 2. Additional 10% if exposure in infra | 1. 25% |
(as % of eligible capital base/Tier 1 capital of NBFC)
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
- Trends within the infrastructure, Real Estate and Renewable Energy sectors
- Impact analysis of new regulations and policies on lending and capital flow
Author:
Debopam Chaudhuri, Head of Research and Ratings
+91-9819239926, dc@truboardpartners.com
Author:
Debopam Chaudhuri
Head of Research and Ratings
+91-9819239926
dc@truboardpartners.com
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