RBI’s discussion paper proposes strict regulations for large NBFCs

A discussion paper on regulation of non-banking finance companies (NBFCs) by Reserve Bank Of India (RBI) has set tighter regulations for large NBFCs and proposed a multilayer model in the industry.

The multiple layer structure will categorise NBFCs depending on their size and interconnectedness with the system. NBFCs in the lower layer will be known as NBFC-Base Layer (NBFC-BL). NBFCs in the middle layer will be known as NBFC-Middle Layer (NBFC-ML) and NBFC in the Upper Layer will be known as NBFC-Upper Layer (NBFC-UL), the RBI said.

Further, the central bank has called for feedback on this discussion paper.

The step is taken to tighten regulations and to safeguard the financial system considering the growing size of certain companies and their link to the rest of the system.

“In view of the recent stress in the sector, it has become imperative to reexamine the suitability of this regulatory approach, especially when failure of an extremely large NBFC can precipitate systemic risks,” the RBI said.

As reported by Moneycontrol, RBI said, “In the last few years there have been some major NBFC failures such as IL&FS and DHFL .”

According to the RBI discussion paper, the process of identification of NBFC-UL based on parametric analysis discussed above shall be conducted as a yearly exercise. Once identified as NBFC-UL, the NBFC will be advised individually about its classification as a NBFC-UL and that it will be subjected to regulation akin to banks, the RBI said.

A time-period of eight weeks will be provided to the NBFC to enable it to chart out a plan for implementation. Within the allotted time period, the RBI said. The methodology for assessing the NBFC-UL will be reviewed on a regular basis, which is at least once in four years, the RBI said.

NBFCs in the upper layer will have to comply with common equity Tier 1 capital regulations like commercial banks. They need to maintain a 9% CET1 ratio, the RBI said.

“It is felt that CET 1 could be introduced for NBFC-UL to enhance the quality of regulatory capital. It is proposed that CET 1 may be prescribed at 9% within the Tier I capital,” RBI added.

NBFCs will also have to comply with the 90-day NPA classification rule such as banks. The RBI discussion paper has also proposed to increase the minimum capital norms from Rs2 crore to RS 20 crore for NBFCs. Also, the threshold to identify systemically important NBFCs has been raised to Rs 1,000 crore from Rs 500 crore.

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