Exposure Norms

Exposure Norms

Subject: economy

The Reserve Bank of India (RBI) laid down a set of rules for non-bank financiers on large exposures, lending to directors and sought additional disclosures in their notes to accounts.

Details:

• Aggregate exposure of an upper layer NBFC to any entity must not be higher than 20% of its capital base, although the board can approve an additional 5% to take it to 25%, except for infrastructure finance companies, the aggregate limit will be 30% to a single entity.
• To a group of connected entities, aggregate exposure will be limited to 25% of the capital base for all upper layer NBFCs apart from infrastructure finance companies where it will be 35%.
• Unless sanctioned by the board of directors, NBFCs in the middle and upper layer should not grant loans of ₹5 crore and above to their directors or relatives of directors.
• Loan proposals for less ₹5 crore to directors may be sanctioned by the appropriate authority in the NBFC, but the matter should be reported to the board.
• Loans sanctioned to senior officers of NBFCs should be reported to the board.

These, however, would exclude loans against government securities, life insurance policies, fixed deposits, stocks and shares; housing loans and car loans granted to an employee of the NBFC under any scheme applicable generally to employees will also be exempt from these guidelines.

• Non-bank lenders will have to ensure that potential real estate borrowers have obtained prior permission from the government for the project, wherever required.
• The base layer of non-banks must have a board-approved policy on grant of loans to directors, senior officers and relatives of directors and to entities where directors or their relatives have major shareholding.
• All non-bank lenders will have to disclose their exposure to real estate sector, capital market, intra-group entities, and unhedged foreign currency exposure. They must also make adequate related-party disclosures, and provide a summary information on complaints received by the NBFCs.

Exposure norms:

• Credit exposure is a measurement of the maximum potential loss to a lender if the borrower defaults on payment. It is a calculated risk to doing business as a bank. “Credit exposure” shall include funded and non-funded credit limits, underwriting and other similar commitments.
• Exposure limit determines the maximum amount a bank can lend to one business house. This is done to prevent the troubles at entities having a spillover effect on the bank which could lead to a systemic risk.
• The Reserve Bank of India has mandated the banks to fix limits on their exposure to specific industry or sectors and has prescribed regulatory limits on banks’ exposure to single and group borrowers in India. This measure of RBI is aimed at better risk management and avoidance of credit risks. In addition to credit exposure banks are required to observe certain statutory and regulatory exposure limits in respect of advances against / investments in shares, convertible debentures /bonds, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) as prudential norms.

Regulatory Structure for NBFCs:

NBFCs shall comprise four layers based on their size, activity, and perceived riskiness.

• NBFCs in the lowest layer – Base Layer (NBFC-BL).
• NBFCs in the middle layer –Middle Layer (NBFC-ML)
• NBFC in the Upper level – Upper Layer (NBFC-UL)
• The Top Layer is ideally expected to be empty and will be known as NBFC – Top Layer (NBFC-TL).

Base Layer

The Base Layer shall comprise of

(a) non-deposit taking NBFCs below the asset size of ₹1000 crore and

(b) NBFCs undertaking the following activities- (i) NBFC-Peer to Peer Lending Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface1

Middle Layer

The Middle Layer shall consist of

(a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size,

(b) non-deposit taking NBFCs with asset size of ₹1000 crore and above and

(c) NBFCs undertaking the following activities (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs).

Upper Layer

The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology.

Top Layer

The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.