RBI Circular: New Guidelines for NBFCs and HFCs on Credit and Investment Concentration Norms

Key Takeaways:

1. Credit Risk Transfer Instruments for NBFC-ML:

New regulations introduced for NBFC-Middle Layer (NBFC-ML) focusing on the computation of exposure through Credit Risk Transfer Instruments.

Eligible instruments for offsetting exposures include cash margin/security deposit, government guaranteed claims, and guarantees issued under Credit Guarantee Schemes.

2. Exemptions from Credit/Investment Concentration Norms:

Additional exemptions granted for NBFC-ML, including exposures to Government of India, State Governments, and fully guaranteed exposures by the Government of India.

3. Disclosure Requirements:

NBFCs exceeding prudential exposure limits are required to disclose these exposures in the Notes to Accounts, with computation of exposure limits outlined in the circular.

4. Internal Policies for NBFC-BL:

NBFC-Base Layer (NBFC-BL) directed to establish internal Board-approved policies for credit/investment concentration limits, aligning with the methodology for NBFC-ML.

5. Clarifications for NBFC-UL:

Clarifications provided for credit risk transfer instruments for NBFC-Upper Layer (NBFC-UL), emphasizing the criteria for eligible guarantees.

6. Implementation Date and Continued Compliance:

The circular is effective immediately from the date of issuance, with all other terms and conditions for Large Exposures Framework (LEF) and credit/investment concentration norms continuing as per existing instructions.

Synopsis:

The circular issued by the Reserve Bank of India (RBI) on January 15, 2024, introduces new guidelines on credit and investment concentration norms for Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). The aim of these guidelines is to ensure uniformity and consistency in the computation of concentration norms among NBFCs, thereby streamlining practices for better risk management.

Key Changes and Highlights:

1. Credit Risk Transfer Instruments for NBFC-ML:

The circular introduces a new set of regulations for NBFC-Middle Layer (NBFC-ML), focusing on the computation of exposure through Credit Risk Transfer Instruments.

Eligible instruments for offsetting exposures include cash margin/caution money/security deposit, Central and State Government guaranteed claims, and guarantees issued under Credit Guarantee Schemes, subject to specific conditions.

2. Exemptions from Credit/Investment Concentration Norms:

Additional exemptions are granted from credit/investment concentration norms for NBFC-ML, including exposures to Government of India and State Governments eligible for zero percent risk weight, and exposures fully guaranteed by the Government of India.

3. Disclosure Requirements:

NBFCs exceeding prudential exposure limits during the year are now required to disclose these exposures in the Notes to Accounts. The computation of exposure limits for disclosure purposes is outlined in the circular.

4. Internal Policies for NBFC-BL:

NBFC-Base Layer (NBFC-BL) is directed to establish internal Board-approved policies for credit/investment concentration limits for both single borrowers and groups of borrowers. The computation of exposure for NBFC-BL aligns with the methodology for NBFC-ML.

5. Clarifications for NBFC-UL:

The circular provides clarifications for credit risk transfer instruments for NBFC-Upper Layer (NBFC-UL), emphasizing that guarantees must be direct, explicit, irrevocable, and unconditional.

6. Implementation Date and Continued Compliance:

The circular is effective immediately from the date of issuance. All other terms and conditions for Large Exposures Framework (LEF) and credit/investment concentration norms shall continue as per existing instructions.

Conclusion:

The RBI’s proactive approach to refining credit and investment concentration norms for NBFCs demonstrates its commitment to financial prudence and stability. The revised guidelines provide a clear framework for computation, exemptions, and disclosures, fostering a consistent and transparent risk management environment within the NBFC sector. As financial institutions navigate these changes, adherence to the revised norms is essential to ensure the continued resilience of the financial system.

FAQ:

Q1: What is the effective date of the circular?

A1: The circular is effective immediately from the date of issuance, and all other terms and conditions for Large Exposures Framework (LEF) and credit/investment concentration norms shall continue as per existing instructions.

Q2: What are the key changes introduced for NBFC-Middle Layer (NBFC-ML)?

A2: The circular introduces new regulations for NBFC-ML, focusing on the computation of exposure through Credit Risk Transfer Instruments, including eligible instruments for offsetting exposures.

Q3: Are there any exemptions from credit/investment concentration norms for NBFC-ML?

A3: Yes, additional exemptions are granted for NBFC-ML, including exposures to Government of India, State Governments, and fully guaranteed exposures by the Government of India.