A working group set up by the Reserve Bank of India (RBI) has recommended higher capital requirements as also a phased application of accounting and provisioning norms that are currently applicable to banks for non-banking finance companies (NBFCs) as well.
The working group headed by former RBI deputy governor and current director of the Centre for Advanced Financial Research and Learning (CAFRAL), Usha Thorat, has also recommended higher risk weights for lending to stocks and real estate sectors by the NBFCs.
The group was set up to review all regulations relating to the NBFC sector in the light of concerns about NBFCs exploiting regulatory gaps to assume role similar to that of banks.
The new regulation aims at aligning rules for NBFC and banks since both leverage on public funds (deposits). It also aims at simplifying and rationalising the scope of regulation and registration so as to focus on risk-based regulation of non-deposit taking entities.
The new regulation also tries to retain the innovative nature of NBFCs engaged in productive sectors while placing buffers to cushion risk on account of concentration and funding pattern inherent in the business model and exposure to sensitive sectors, RBI said.
While dealing with regulatory arbitrage, the revised guidelines for NBFCS aims at strengthening governance, disclosure and supervision to ensure that the changes recommended cause minimum disruption and that NBFCs get adequate transition time for compliance to the recommendations, except where expressly specified.
Besides the group has recommended that a number of regulations that currently apply to banks be applied to NBFCs also.
The key recommendations are:
- All new NBFCs wanting to get registered within the RBI should have minimum net owned funds (NOF) of Rs50 crore while existing NBFCs may continue with a minimum Rs2 crore NOF till the Reserve Bank of India Act is amended. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years;
- NBFCs not accessing public funds may be exempted from registration provided their assets are below Rs1,000 crore;
- Any transfer of shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC should have prior approval of the RBI;
- The twin-criterion of assets and income for determining the principal business of an NBFC should be increased to 75 per cent of the total asset and 75 per cent of the total income, respectively. A time period of three years may be given to fulfill revised principal business criteria;
- Tier I capital for capital to risk weighted assets ratio (CRAR) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs;
- Liquidity ratio may be introduced for all registered NBFCs such that cash, bank balances and holdings of government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days;
- Asset classification and provisioning norms similar to banks to be brought in phased manner for NBFCs. Suitable income tax deduction akin to banks may be allowed for provisions made under the regulations. Accounting norms applicable to banks may be applied to NBFCs;
- NBFCs may be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by the Securities and Exchange Board of India (SEBI), while undertaking margin financing;
- Financial conglomerate approach may be adopted for supervision of larger NBFCs that have stockbrokers and merchant bankers in the group;
- Government owned entities that qualify as NBFCs may comply with the regulatory framework applicable to NBFCs at the earliest.
- Board approved limits for bank's exposure to real estate may be made applicable for the bank group as a whole, where there is an NBFC in the group. The risk weights for NBFCs that are not sponsored by banks or that do not have any bank as part of the group may be raised to 150 per cent for capital market exposures and 125 per cent for commercial real estate (CRE) exposures. In case of bank sponsored NBFCs, the risk weights for capital market exposures (CME) and CRE may be the same as specified for banks;
- NBFCs may be given the benefit under securitisation and reconstruction of financial assets and enforcement of security interest (SARFAESI) Act, 2002;
- Captive NBFCs, the business models of which focus mainly (90 per cent and above) on financing parent company's products, may maintain Tier I capital at 12 per cent from the time of registration. Supervisory risk assessment of such companies should take into account the risk of the parent company;
- For the purpose of applicability of registration and supervision, the total assets of all NBFCs in a group should be taken together to determine the cut off limit of Rs100 crore;
- All NBFCs with assets of Rs1,000 crore and above, whether listed or not, should be required to comply with Clause 49 of SEBI Listing Agreements, including mandatory disclosures;
- Disclosure for NBFCs with assets over Rs100 crore may include provision coverage ratio, liquidity ratio, asset liability profile, extent of financing of parent company products, movement of non-performing assets (NPAs), off-balance sheet exposures, structured products and securitisations/assignments.
- NBFCs with assets of Rs1,000 crore and above should be inspected comprehensively on an annual basis with an annual stress test carried out to ascertain their vulnerability.