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Business News/ Industry / Banking/  RBI proposes tighter NBFC norms
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RBI proposes tighter NBFC norms

RBI draft rules aim to classify NBFCs under ‘exempted’, ‘registered categories’, based on their asset size

The Reserve Bank of India had set up a panel to review rules as it was concerned about the rapid growth of some NBFCs in last few years. (The Reserve Bank of India had set up a panel to review rules as it was concerned about the rapid growth of some NBFCs in last few years.)Premium
The Reserve Bank of India had set up a panel to review rules as it was concerned about the rapid growth of some NBFCs in last few years.

(The Reserve Bank of India had set up a panel to review rules as it was concerned about the rapid growth of some NBFCs in last few years.)

Mumbai: The Reserve Bank of India (RBI) on Wednesday issued draft regulations for non-banking financial companies (NBFCs) that could significantly impact their growth and tighten the asset classification and provisioning norms of such firms to bring them on par with commercial banks.

The draft rules aim to classify NBFCs under “exempted" and “registered categories", based on the size of their assets and deposit-taking status.

Based on the recommendations of a working group headed by former RBI deputy governor Usha Thorat, the draft rules stipulate a broader framework on a range of issues relating to entry point norms, business criteria and liquidity requirements, among others.

The proposed rules are open to public comment until 10 January 2013.

RBI had set up the committee to review rules for NBFCs as it was concerned about the rapid growth of some of them in the last few years, given the lighter regulations on them compared with those of commercial banks.

The rising exposure of commercial banks to such companies has also worried the apex bank. On 19 October, banks had lent 2.3 trillion to NBFCs, up 28% from the previous year.

The draft rules say even government-sponsored NBFCs will need to comply with the new norms.

The draft rules don’t permit NBFCs to accept deposits unless they are rated. Existing unrated deposit-taking NBFCs will be given one year to get themselves rated and will not be allowed to accept any fresh deposits or renew existing deposits, unless they are rated by that time.

All deposit-taking NBFCs, irrespective of their size, will continue to be registered with the central bank while the non-deposit taking ones will be exempted from the central bank’s regulation.

The regulator said all NBFCs with an asset size less than 25 crore “whether accepting public funds or not" will be exempt from its rules.

The rationale for exemption is that the excluded NBFCs shouldn’t contribute to any major systemic risks or disruptions in the market. Also, the tighter rules won’t prevent small but potentially dynamic and innovative start-up companies from entering financial activity, thanks to the exemptions.

NBFCs with an asset size below 500 crore and not accepting public funds, directly or indirectly, will also be exempt, the central bank said. Currently, the central bank regulates all NBFCs, regardless of their size and deposit-taking status.

Financial entities with an asset size of 1,000 crore or above, holding financial assets that constitute 50% of the total assets or generate at least 50% of financial income as a proportion of gross income, also need to be registered and regulated by RBI, the central bank said.

Even a company not accepting deposits will have to register with RBI when financial assets touch 25 crore and constitute at least 75% of total assets and financial income constitutes a minimum 75 % of its gross income, RBI said.

Defining entry norms, RBI said, “No NBFC shall commence or carry on the business of NBFC without having net-owned funds of 25 lakh or such other amount not exceeding 2 crore as may be specified by RBI."

According to the draft rules, existing NBFCs should reach a minimum 25 crore of financial assets within a period of two years.

NBFCs that are unable to achieve this will be deregistered and barred from operating, RBI said. Deposit-taking NBFCs that fail to achieve the minimum threshold will be barred from collecting fresh deposits and will have to repay existing deposits to investors.

The draft rules also propose to increase the risk weight and asset classification norms for NBFCs, especially for those that belong to a banking group.

While the risk weight on exposure to the capital market and real estate for NBFCs in a bank group will be the same as specified for banks, for those not sponsored by banks or not part of a group, this may be raised to 150% for capital market exposure and 125% for commercial real estate, RBI said.

The central bank also proposes to tighten norms on bad loan classification. NBFCs will have to classify loans as bad in 90 days, the same as commercial banks, from 180/360 days now. This can be done in a phased manner in the next three years, RBI said.

The draft rules also propose an increase in the provisioning for standard assets for NBFCs from 0.25% to 0.4% of the outstanding amount, effective 31 March 2014.

The draft guidelines propose to raise the tier I capital ratio, or the core capital component, for all NBFCs. For non-deposit taking captive NBFCs, or those primarily engaged in financing the parent company’s products, tier I capital is proposed to be raised to 12% from 7.5% earlier. NBFCs engaged in lending to infrastructure should have a tier I capital ratio of 10%, the same as now. Also, gold loan NBFCs will have to carry a minimum tier I capital adequacy ratio of 12% from 1 April 2014, compared with 10% now.

“Existing NBFCs that do not fulfil the requirement would be given a period of three years from the date of this notification to comply, upon which they shall produce a statutory auditor’s certificate to the effect," the draft guidelines said.

Those NBFCs with a 12% tier I capital ratio will be exempted from carrying higher risk weightages on sensitive sectors such as the capital market and commercial real estate.

NBFCs that are not mandated to have a 12% minimum capital adequacy ratio should put the same risk weight to their assets as that of banks—150% for capital market exposure and 125% for commercial real estate.

If the draft guidelines are accepted, asset finance companies stand to lose out as the draft rules propose the limit for acceptance of deposits for rated asset finance companies from four times to 2.5 times of net owned funds.

dinesh.n@livemint.com

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Published: 13 Dec 2012, 12:58 AM IST
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