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The Upper Layer shall comprise the NBFCs, which the Reserve Bank identifies explicitly as necessary to increase the compliance requirement based on a set of parameters and scoring methodology.
Components of the parametric analysis for Upper Layer:-
Regarding asset size, the top ten NBFCs shall permanently reside in the upper layer, irrespective of any other factor.
Government-owned NBFCs should be in the Base Layer/ Middle Layer, as the case may be. They shall not be placed in the Upper Layer until further notice.
NBFC-Upper Layer shall maintain standard Equity Tier-1 Capital for at least 9 Percent of Risk-Weighted Assets.
Common Equity Tier 1 (CET1) ratio =Common Equity Tier 1 Capital
Total Risk-Weighted Assets
Common Equity Tier 1 capital shall comprise of:–
Consequent upon its revaluation by the applicable accounting standards, it may, at the discretion of the NBFC, be reckoned as CET-1 capital at a discount of 55% instead of Tier-2 capital under extant regulations, subject to the following conditions:-
EPt=NPt -0.25 *D*t
Where: EPt=Eligible profit up to quarter of the current financial year, t shall vary from 1 to 4
NPT=Net profit up to quartered
Average of dividends paid during the last three years.
Losses in the current financial year shall be fully deducted from CET 1.
The following Adjustment shall be applied in the calculation of CET1 Capital to be deducted from those mentioned above:-
NBFC-Upper Layer shall maintain provisions for the ‘standard’ assets at the below-mentioned rates for the funded amount outstanding:
The same shall also be applicable in the case of derivative transactions.
NBFCs with a Net worth of Rs. 250 Crore or above shall be required to comply with Ind AS for the preparation of their financial statements; they shall continue to hold impairment allowances as required under Ind AS, subject to the prudential floor as prescribed under Paragraph 2 of the Annex.
Where impairment allowance (IA) under Ind AS 109 is less than the provisioning requirement under the IRACP ( which includes the standard-asset provisions).
NBFC/ARCs can appropriate the difference from their net profit/ loss after tax to a separate ‘Impairment Reserve’.
The ‘Impairment Reserve’ balance shall not be reckoned from the capital.
Further, this reserve will not permit withdrawals without prior permission from the Department of Supervision, RBI.
As per the board-approved policy, disclosure requirements must be placed along the same lines as applicable to a listed company even before the listing.
NBFC-UL should also determine internal exposure limits on other essential sectors to which credit is extended. Further, NBFC-UL shall put an internal board-approved limit for exposure to the NBFC sector.
Once the NBFC is identified as NBFC-UL by the Department of Regulation, it shall comply with the following:-
Transition of NBFCs to the Upper Layer
a) Once the NBFC is categorised as NBFC-UL, it shall enhance its regulatory requirement within five years from its classification in the layer, even if it does not meet the parametric criteria.
In other words, they will be eligible to move out of the enhanced regulatory framework only if they do not meet the criteria for the classification for the 5 consecutive years.
b) The NBFC-Upper layer may, however, move out of the enhanced regulatory framework before the period if the movement is a voluntary strategic move to readjust operations as per an approved policy. This stipulation shall not apply if operations are scaling down due to adverse situations specific to the NBFC and its deteriorating financial conditions.
c) NBFCs close to meeting such Parameters as prescribed for the NBFC-Upper Layer shall be intimated to readjust their operations as they want to continue as NBFC-Middle Layer.
All the compliances shall apply to the Base layer, and the Middle layer shall apply to the Upper layer.
As the NBFCs are getting categorised as an Upper layer, transparency and regulatory compliances have increased, and more is expected from the NBFCs.
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