The Reserve Bank has announced a slew of regulatory changes for non-banking lenders by amending the October 2021 circulars on scale-based regulations, which have brought in large NBFCs almost on par with bankers when it comes to addressing their credit risk concentration. The regulator on Tuesday issued four separate circulars: Large exposures framework for NBFCs -- upper layer; Disclosures in their financial statements; Scale-based regulation for capital requirements - upper layer; and Regulatory restrictions on their loans and advances. These are improvements on the October 22, 2021, circulars.
On the large exposure framework with the upper layer, the regulator said these prudential guidelines are aimed at addressing credit risk concentration in NBFCs and are set out to identify large exposures, refine the criteria for grouping of connected counterparties and put in place reporting norms for large exposures.
The regulator said the sum of all the exposure value of an NBFC to a single counterparty cannot exceed 20 per cent of its available eligible capital base at all times.
However, the board can allow an additional 5 per cent exposure beyond 20 per cent but at no time higher than 25 per cent of its eligible capital base, if the NBFC has a board-approved policy, setting out conditions under which over 20 per cent exposure may be considered; and if it informs the RBI in writing the exceptional reasons for which exposure beyond 20 per cent is being allowed in a specific case.
But the new norms allow an NBFC into infrastructure financing can exceed the exposure limit by 5 per cent of its tier I capital to a single counterparty - means 30 per cent of the tier I capital -- if the additional exposure is on account of infrastructure loan and/or investment in which case it can go up to 35 per cent.
However, the new norms retain the definition of tier I capital as defined in the master direction issued in 2016 for systemically important NBFC and said profit accrued during the year will be reckoned as tier I capital after making necessary adjustments as per the guidelines applicable.
Regulated entities have to obtain an external auditor's certificate on completion of the augmentation of capital and submit the same to the Reserve Bank before reckoning the additions to capital funds, it said, adding an eligible capital base means tier 1 capital.
Large exposure means the sum of all exposure values measured to a counterparty and/or a group of connected counterparties if it is equal to or above 10 per cent of the eligible capital base, it said.
What has changed in the new circular is that the scope of application is applicable both at the solo level and consolidated level and exposure shall comprise both on and off-balance sheet exposures.
On the disclosures in NBFCs' financial statements, the new circular makes it mandatory for them to make disclosures in financial statements in accordance with the new prudential guidelines, applicable accounting standards, laws, and regulations.
The additional disclosure requirements are in accordance with the scale based regulatory framework and are an addition to the disclosure requirements specified under other laws, regulations, or accounting and financial reporting standards.
The new disclosure requirements shall be effective for annual financial statements for FY23.
On the regulatory restrictions on loans and advances of NBFCs based on the scale based regulation, which was first issued on October 22, 2021, it said the new guidelines will come into play from October 1, 2022.
Under the scale-based regulation for NBFCs' capital requirements -- upper layer, they have to maintain an equity tier 1 capital of at least 9 per cent of the risk-weighted assets, wherein the common equity tier 1 capital will comprise the paid-up equity share capital, share premium resulting from equity shares, capital reserves representing surplus arising out of asset sales, statutory reserves, revaluation of reserves arising out of change in the carrying amount of property consequent to its revaluation in accordance with the applicable accounting standards.
All these may be reckoned as CET1 capital at a discount of 55 per cent, instead of as tier 2 capital under extant regulations.
But this is subject only if the property is held for its own use by the NBFC and it can sell it readily at its own will sans any legal impediment; if revaluation reserves are presented/disclosed separately in the financial statements and the value is realistic and are in accordance with applicable accounting standards and are obtained from two independent valuers, among others.
It also allows an NBFC to reduce the accumulated losses from CET 1, while profits in the current financial year may be included on a quarterly basis if it has been audited or subject to limited review by the statutory auditors. Further, such profits shall be reduced by the average dividend paid in the last three years.
Also, it allows deducting the entire losses in the current year from CET 1 (Common Equity Tier).
The new regulatory adjustments/deductions shall be applied in the calculation of CET1 capital if it is deducted from the sum of items for goodwill and other intangible assets, goodwill and all other intangible assets should be deducted from the common equity tier 1 capital.
Investment in shares of other NBFCs and in shares, debentures, bonds, outstanding loans and advances, including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, 10 per cent of the owned fund of the NBFC.
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