Systemically Important NBFCs to Be Classified As QIB

Narendra Kumar

22 Oct, 2020

RBI has allowed an NBFC with assets size more than 500 Cr to be classified as QIB (Qualified Institutional Buyers), this step of RBI has been welcomed by most of the Early-stage Non Banking Financial Companies.

What is the role of NBFC in Indian Economy?

NBFCs play a vital role from the perspective of macroeconomics and act as a core catalyst in the financial system of India. They are continuously growing as healthier alternatives to conventional banks, catering to the financial needs of various sectors.

However, to survive in the long run and to constantly grow, the NBFCs need to focus on their core strengths, while improving their weaknesses. Being dynamic and efficient is the need of the hour. Due to the diversity of types and operations, the regulatory framework by the Reserve Bank governing the workings of the NBFCs has been going through major changes. While the non-deposit accepting, non-systematically important NBFCs have been entertained with many privileges, the systematically important NBFCs are subject to various regulatory compliances.

Now, let us take a look at the meaning of systematically important NBFCs.

What are Systemically Important NBFCs?

NBFC registration with RBI having an asset size is of INR 500 crores or more as per last audited balance sheet, are considered as systemically important NBFCs. In the view of the Reserve Bank of India, the reason for such classification is that the operations and activities of such NBFCs will affect the financial stability of the economy as a whole.

The prudential regulations, as well as the business regulations, are applicable to the systematically important NBFCs^[1] and there is no prescribed leverage ratio.

What are Asset Classification and Provisioning Norms for Systemically Important NBFCs?

In view of harmonizing the asset classification and provisioning norms with that of the conventional banking system, a default period of 90 days has been prescribed for the classification of a loan as a non-performing asset. In addition, the existing provision of standard assets has been increased from 0.25% to 0.40 % of the value of such assets to bring them on par with banks.

Why is RBI Keeping Close Monitoring on Systemically Important NBFCs’?

Increase of Tier I capital requirement for capital adequacy purposes

For the systematically important non-deposit accepting NBFCs, the requirement of minimum Tier-I capital has been increased to 10 % by March 2017.

Credit Concentration Norms

The norms have been harmonized by removing the dispensation given to asset finance companies (AFCs), As a result, the defined norms have been exceeded by 5 %. On the other hand, the dispensation implied upon the infrastructure finance companies and infrastructure debt funds have been kept as same as these loans are generally of high values.

Corporate Governance

In view of the recommendation of the Thorat Committee, which was set up to study the factors impacting the NBFC sector, corporate governance has been identified as an important part of the NBFC regulations.

In the earlier scenario, the constitution of the Audit Committee was mandatory for the following types of NBFCs:

• Having assets of 50 crore INR and above;
• Having deposits of 20 crore INR and above.

However, the constitution of the Nomination Committee and the Risk Committee were only recommended, not mandatory.

As per the recent change in the Regulatory framework of NBFCs, the following committees are mandatory for non-deposit accepting systematically important NBFCs (NBFCs-ND-SI):

• Audit Committee
• Nomination Committee
• Risk Committee

Moreover, it is mandatory for NBFCs-ND-SI to rotate the partners of the audit firms, appointed as their statutory auditors, in every three years. This was only suggested under the earlier framework.

Regulations for the Directors of Systemically Important NBFCs

The revised regulatory framework further laid down the compliance requirements in respect of Directors of NBFCs-ND-SI. These are:

• Drafting as well as putting in place, a policy determining “fit and proper criteria” for directors;
• Complying with the additional disclosure requirements for directors.

Other Important Key Points Regarding Systemically Important NBFCs

1. In the case of multiple NBFCs falling in the same group, whose combined asset size is 500 crore INR or more, each of the NBFCs, whether systematically important or not, shall comply with the regulations applicable to NBFCs-ND-SI.
2. All NBFCs, whether NBFCs-ND-SI or not, are required to obtain prior approval from the Reserve Bank for effecting any change in management or control.
3. The systematically important NBFCs are required to fulfil all the compliances applicable to them imposed by RBI from time to time.

Conclusion

The famous phrase “Duty comes with Responsibility” is appropriately applicable to the systematically important NBFCs. Through their larger size and operations, they tend to create a wider impact on the overall financial market.

Therefore, there is a continuous need to keep a watch on their performance and activities for a smoother existence. The RBI, on one hand, is encouraging the growth of such NBFCs while monitoring their actions.

Read our article:How are emerging technologies helping NBFC’s?