Home / Politics / Policy /  RBI may tighten capital adequacy rules for NBFCs

Mumbai: The Reserve Bank of India (RBI) is likely to tighten certain regulations governing non-banking financial companies (NBFCs) following the crisis at Infrastructure Leasing & Financial Services Ltd (IL&FS), experts said. They expect RBI to tighten regulations around NBFCs’ capital adequacy norms, related party transactions and asset liability mismatches.

The monetary policy committee (MPC) of the central bank will release its bimonthly policy statement on Friday, 11 October. Along with the policy, RBI also releases a statement of developmental policies, and it is expected to include these changes to NBFC guidelines.

“We expect some tweaking of rules on liquidity management of NBFCs from the asset liability management (ALM) point of view. Currently, NBFCs borrow in the commercial paper (CP) market, essentially a short-term instrument for lending long-term. RBI could look at ending this type of lending," said Rashesh Shah, chairman and chief executive of Edelweiss Financial Services.

Shah added that as far as asset quality norms are concerned, NBFCs are on par with banks and these norms do not require further tightening.

Some experts pointed out the need for tightening regulations pertaining to core investment companies (CICs). Core investment companies are NBFCs that hold not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.

“There needs to be a rethink on the regulations concerning core investment companies. Currently, these NBFCs have a light-touch regulation, which is likely to change post the IL&FS crisis," said a senior banker, asking not to be identified. He added that it is to be seen how RBI effectively regulates holding companies like IL&FS which are involved in both financial services business and real sector activities. The holding company IL&FS for instance has 169 group companies, of which 24 are direct subsidiaries, 135 indirect subsidiaries, six joint ventures and four associate companies. Experts believe there needs to be a relook at the IL&FS model of taking exposure to both project execution and financing.

The liquidity crisis surfaced when IL&FS defaulted on payment obligations, which was followed by downgrades by credit agencies in the past two months. On 17 September, rating agency Icra downgraded IL&FS’s credit rating to default, after it failed to meet repayment obligations of 12,000 crore in short-term and long-term borrowings.

In December 2012, RBI had stipulated that deposit-accepting NBFCs maintain a statutory liquidity ratio (SLR) of 15% of aggregate deposits.

The central bank has always recognized the need for a well-regulated NBFC sector and its impact on the economy. In a speech on 7 January, 2013, erstwhile RBI deputy governor Anand Sinha had said that traditionally, regulation of banks has assumed greater importance than that of their non-banking counterparts, since that protection of depositors has traditionally been an important mandate of banking supervisors. Sinha had spoken about the shadow banking system which is defined as credit intermediation involving entities and activities (fully or partially) outside the regular banking system.

“However, when non-bank financial entities, which are subject to no regulation or light-touch regulation, undertake bank-like functions, large risks are created which could potentially be destabilizing for the entire system," Sinha had said.

He had added that the global financial crisis demonstrated many ways in which shadow banking can have an impact on the global financial system, both directly and through its interconnectedness with the regular banking system, prompting the move to overhaul the regulation of shadow banking system.

NBFC regulations in India were changed after the 2008 financial crisis. The RBI has prescribed tighter prudential norms for NBFCs-ND-SI (systemically important non-deposit taking NBFC) and all NBFCs-D (deposit-taking) categories. The minimum tier I capital requirement has been 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 in provisioning requirement for standard assets to 0.4% in a phased manner by March 2018.

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