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The central bank has released four separate circulars viz. Large exposures framework for NBFCs- Upper Layer (NBFC-UL), scale based regulations for capital requirements-Upper layer, disclosures in their financial statements and Regulatory restrictions on their loans and advances. These improvements have been made on the October 22, 2021 circulars.
These norms have been brought to address the credit risk concentration in Non-Banking Finance Companies (NBFCs). The changes have been made to the previously released circular titled “Scale Based Regulations: A Revised Regulatory Framework” for which a Large Exposure Framework (LEF[1]) has been prescribed for NBFCs in the Upper Layer.
Table of Contents
According to RBI, the meaning of “Tier I Capital” for the purpose of the guidelines has the same meaning which has been defined in the October 21 circular. The RBI also made clear that all the profits accrued during a year shall be reckoned as Tier I capital for the purpose of Large Exposure Framework after making the required adjustments according to the guidelines applicable to NBFCs- Upper Layer.
NBFCs-UL have been directed to obtain a certificate from an external auditor once the augmentation of capital has taken place and the certificate shall be submitted to RBI (Department of Supervision) before the reckoning the additions to capital funds.
In these new guidelines, RBI has tried to explain the meaning of the term ‘control’ which according to RBI means the right to appoint the majority of directors or to control the management or policy decisions which are taken by a person individually or persons acting individually or in agreement, either directly or indirectly by virtue of their management rights or their shareholding or shareholder’s agreements or voting agreements or in any other manner.
Clarity was also given by RBI about the meaning of “Group of connected counterparties”. It means that two or more (both natural and legal) who satisfy at least one of the conditions- control relationship and economic interdependence.
The criteria of control relationship automatically get satisfied if one of the parties own more than 50 per cent of the voting rights of the other entity.
Criteria of economic interdependence
In cases where connectedness has to be shown on the basis of economic interdependence, NBFC-UL should consider, at least, the following criteria as suggested by RBI:
RBI explains the term ‘large exposure’ which means sum of all the exposure values of an NBFC-UL to a counterparty and/or a group of connected counterparties, if it is equal to or above 10% of the NBFC-UL’s eligible capital base.
These guidelines are applicable to NBFC-UL both at solo level and at the consolidated (group) level. The exposure in this case will comprise both on and off-balance sheet exposures by the NBFC-UL.
The sum of all the exposure values of an NBFC-UL to a single counterparty should not be higher than 20 percent of the NBFC-UL’s available eligible capital base at all times. RBI allows the board of the NBFC-UL an additional 5% exposure above 20 percent but not in any case beyond 25% of the NBFC-UL’s eligible capital base, subject to conditions. A special allowance is given by RBI to Infrastructure Finance Company (IFC) to further exceed the exposure limit of 5% of Tier I capital for exposure to a single counterparty. In case of groups of connected counterparties, RBI states that all the exposure values of an NBFC-UL to a group of connected counterparties will not be higher than 25 per cent of NBFC-UL’s available eligible capital base at all the times. On the other hand, IFC has been allowed to exceed its exposure limit by 10% of its Tier I capital for exposure to a group of connected counterparties.
Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.
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