 "Need to bring govt-owned NBFCs under prudential regulations, says RBI")
In its Financial Stability Report, the Reserve Bank of India (RBI) has highlighted the need to bring government-owned non-banking financial companies (NBFCs) under prudential regulations. According to RBI, these companies should be under the same prudential regulatory framework as applicable to other NBFCs.
"While these NBFCs have been playing a useful role in financing certain critical infrastructure sectors, and certain degree of forbearance might have been warranted in the initial stages, there is a need to bring all deposit-taking and systemically-important government-owned companies under the prudential regulatory framework as applicable to other NBFCs,” said RBI in its FSR report. It said this was in view of the rationalisation of regulations (and where necessary, alignment with banking-sector regulations).
Government-owned NBFCs account for a significant proportion of the total assets and business in the NBFC segment, RBI said. Government-owned NBFCs hold 37 per cent of the assets of the entire NBFC sector, but are exempt, at present, from certain regulatory prudential norms of the Reserve Bank.
The role of the ‘shadow banking system’ defined as ‘credit intermediation involving entities and activities outside the regular banking system’ as a source of systemic risk was an important learning outcome of the global financial crisis. Its importance stemmed not only from its direct role in supplying credit or liquidity to the economy, but also due to its interconnectedness with the more closely regulated banking system.
According to the Financial Stability Board (FSB) methodology and classification, the size of the shadow banking sector in India is estimated to be around $190 billion, which is the 15th largest in the world.
In the Indian financial system, what has been reckoned as shadow banking by the FSB are predominantly NBFCs, which have been under prudential regulation for a long time and account for a relatively small share of the total assets of the Indian financial system.
“However, given the significant interconnectedness of NBFCs with the rest of the financial system, especially banks, they could impact banks under conditions of stress and may face difficulties if banks show reluctance to lend to them in case of a liquidity crunch,” RBI said in its report. Considering these aspects, regulations for NBFCs have been tightened.
Salient features of revised regulatory framework for NBFCs
* The minimum Net Owned Fund (NOF) criterion for existing NBFCs (those registered prior to April 1999) has been increased to Rs 20 million. NBFCs have been allowed till March 2017 to achieve the required minimum levels.
* In order to harmonise and strengthen deposit acceptance regulations across all deposit taking NBFCs (NBFCs-D) credit rating has been made compulsory for existing unrated asset finance companies (AFCs) by March 31, 2016. Maximum limit for acceptance of deposits has been harmonised across the sector to 1.5 times of NOF.
* In view of the overall increase in the growth of the NBFC sector, the threshold for defining systemic significance for non-deposit taking NBFCs has been revised to Rs 500 crore billion from the existing limit of Rs 100 crore.
* Non-deposit taking NBFCs shall henceforth be categorised into two broad categories: NBFCs-ND (those with assets less than Rs 500 crore) and NBFCs-ND-SI (those with assets of Rs 500 crore and above-deemed as systemically important) and regulations will be applied accordingly.
* NBFCs-ND will be exempt from capital adequacy and credit concentration norms while a leverage ratio of 7 has been introduced for them.
* For NBFCs-ND-SI and all NBFCs-D categories, tighter prudential norms have been prescribed - minimum Tier I capital requirement raised to 10% (from earlier 7% in a phased manner by end of March 2017), asset classification norms (from 180 days to 90 days in a phased manner by the end of March 2018) in line with that of banks and increase in provisioning requirement for standard assets to 0.40% in a phased manner by March 2018.
* Exemption provided to AFCs from the prescribed credit concentration norms of 5% has been withdrawn with immediate effect. Additional corporate governance standards and disclosure norms for NBFCs have been issued for NBFCs-D and NBFCs-ND.
* NBFCs with assets of less than Rs 500 crore shall not be subjected to prudential norms if they are not accessing public funds and those not having customer interface will not be subjected to conduct of business regulations.
* Assets of multiple NBFCs in a group shall be aggregated to determine if such consolidation falls within the asset sizes of the two categories. Regulations as applicable to the two categories will be applicable to each of the NBFC-ND within the group. Reporting regime has been rationalised with only an annual return prescribed for NBFCs of assets size less than Rs 500 crore.
"While these NBFCs have been playing a useful role in financing certain critical infrastructure sectors, and certain degree of forbearance might have been warranted in the initial stages, there is a need to bring all deposit-taking and systemically-important government-owned companies under the prudential regulatory framework as applicable to other NBFCs,” said RBI in its FSR report. It said this was in view of the rationalisation of regulations (and where necessary, alignment with banking-sector regulations).
Government-owned NBFCs account for a significant proportion of the total assets and business in the NBFC segment, RBI said. Government-owned NBFCs hold 37 per cent of the assets of the entire NBFC sector, but are exempt, at present, from certain regulatory prudential norms of the Reserve Bank.
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These NBFCs are highly leveraged with a leverage ratio of 6.4 (leverage of state government-owned NBFCs at 8.8 and Central government-owned NBFCs at 6.2) compared to 3.3 for the entire sector. Their aggregate outside liabilities are Rs 3.8-lakh crore, of which Rs 38,500 crore is in the form of bank borrowings.
The role of the ‘shadow banking system’ defined as ‘credit intermediation involving entities and activities outside the regular banking system’ as a source of systemic risk was an important learning outcome of the global financial crisis. Its importance stemmed not only from its direct role in supplying credit or liquidity to the economy, but also due to its interconnectedness with the more closely regulated banking system.
According to the Financial Stability Board (FSB) methodology and classification, the size of the shadow banking sector in India is estimated to be around $190 billion, which is the 15th largest in the world.
In the Indian financial system, what has been reckoned as shadow banking by the FSB are predominantly NBFCs, which have been under prudential regulation for a long time and account for a relatively small share of the total assets of the Indian financial system.
“However, given the significant interconnectedness of NBFCs with the rest of the financial system, especially banks, they could impact banks under conditions of stress and may face difficulties if banks show reluctance to lend to them in case of a liquidity crunch,” RBI said in its report. Considering these aspects, regulations for NBFCs have been tightened.
Salient features of revised regulatory framework for NBFCs
* The minimum Net Owned Fund (NOF) criterion for existing NBFCs (those registered prior to April 1999) has been increased to Rs 20 million. NBFCs have been allowed till March 2017 to achieve the required minimum levels.
* In order to harmonise and strengthen deposit acceptance regulations across all deposit taking NBFCs (NBFCs-D) credit rating has been made compulsory for existing unrated asset finance companies (AFCs) by March 31, 2016. Maximum limit for acceptance of deposits has been harmonised across the sector to 1.5 times of NOF.
* In view of the overall increase in the growth of the NBFC sector, the threshold for defining systemic significance for non-deposit taking NBFCs has been revised to Rs 500 crore billion from the existing limit of Rs 100 crore.
* Non-deposit taking NBFCs shall henceforth be categorised into two broad categories: NBFCs-ND (those with assets less than Rs 500 crore) and NBFCs-ND-SI (those with assets of Rs 500 crore and above-deemed as systemically important) and regulations will be applied accordingly.
* NBFCs-ND will be exempt from capital adequacy and credit concentration norms while a leverage ratio of 7 has been introduced for them.
* For NBFCs-ND-SI and all NBFCs-D categories, tighter prudential norms have been prescribed - minimum Tier I capital requirement raised to 10% (from earlier 7% in a phased manner by end of March 2017), asset classification norms (from 180 days to 90 days in a phased manner by the end of March 2018) in line with that of banks and increase in provisioning requirement for standard assets to 0.40% in a phased manner by March 2018.
* Exemption provided to AFCs from the prescribed credit concentration norms of 5% has been withdrawn with immediate effect. Additional corporate governance standards and disclosure norms for NBFCs have been issued for NBFCs-D and NBFCs-ND.
* NBFCs with assets of less than Rs 500 crore shall not be subjected to prudential norms if they are not accessing public funds and those not having customer interface will not be subjected to conduct of business regulations.
* Assets of multiple NBFCs in a group shall be aggregated to determine if such consolidation falls within the asset sizes of the two categories. Regulations as applicable to the two categories will be applicable to each of the NBFC-ND within the group. Reporting regime has been rationalised with only an annual return prescribed for NBFCs of assets size less than Rs 500 crore.