The Reserve Bank of India has proposed tighter norms for non-banking financial companies with regard to capital requirements, risk weights, provisioning norms and asset classification.
The central bank has proposed that stake transfer of NBFCs of more than 25% will need RBI’s prior approval. In addition, NBFCs having asset size of Rs 1000 crore or more will require RBI’s approval for the appointment of a chief executive officer.
The central bank has released the revised draft guidelines with regard to NBFC regulation based on the recommendations of the Usha Thorat committee which was set up to review the existing regulatory and supervisory framework of such entities.
For all captive NBFCs, those who are primarily engaged in financing parents company’s products, tier-I capital requirement has been raised to 12% from 7.5%.
NBFCs that are involved in financing to sensitive sectors like stock market, real estate and commodities, will also have to maintain 12% tier I capital. For all other NBFC, tier-I capital requirement has been hiked to 10% from 7.5%. Overall capital adequacy requirement of NBFCs have been retained at 15%.
It is proposed that risk weight for NBFCs that are not sponsored by banks, should be 125% for commercial real estate exposure and 150% for capital market exposure.
The central bank has also proposed asset classification norms for NBFCs should be in line with that of banks, though in a phased manner. At present, while banks classify an asset as non-performing if repayment is due for 90 days, for NBFCs it is 180 days. It is now proposed from April 1 2014, NBFCs will classify as account as NPA if payment is overdue for 120 days and follow the 90 day norm after a year later.
“Further, it is proposed to raise the provisioning for standard assets from 0.25% to 0.40% of the outstanding amount from March 31, 2014 for all NBFCs,” RBI said.
The banking regulator has said all the deposit taking NBFC should be rated by a credit rating agency and unrated entities will not be allowed to accept public deposits. Unrated NBFCs-D has been given one year to get themselves rated if they wish to continue to accept deposits.
RBI has laid revised the principal business criteria as it has made by increasing the threshold for NBFC. According to the revised norms, a company that does not accepting deposits, will qualify for registration as NBFC if and when its financial assets aggregate Rs 25 crore and constitute 75% and above of its total assets and financial income constitutes 75% or above of its gross income. Existing NBFCs will be given a period of 2 years with the following milestones for achieving the minimum threshold of Rs. 25 crore of financial assets.
The central bank also said if a group has floated multiple NBFCs but those will not be viewed on a standalone basis and instead their total assets will be aggregated to determine if such consolidation leads to the cut off limit prescribed for a systemically important NBFC that is Rs 100 crore of assets.
Regarding liquidity management of NBFCs, RBI said those entities should maintain high quality liquid assets in cash, and there should not be any liquidity gap in the 1-30 day bucket.