RBI NOTIFIES LARGE EXPOSURES FRAMEWORK FOR NBFC – UPPER LAYER
The Reserve Bank of India, on 19th April, 2022, notified the Large Exposure Framework prescribed for Non-Banking Financial Company in the Upper Layer[i].
Highlights:
·????????These guidelines aim at addressing credit risk concentration in NBFCs and set out to identify large exposures, refine the criteria for grouping of connected counterparties and put in place reporting norms for large exposures.
·????????NBFC-UL is defined as an NBFC placed in the upper layer according to the “Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs”.
·????????Profits accrued during the year will be reckoned as Tier I capital for the purpose of LEF after making necessary adjustments. The NBFC-UL shall obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to the Reserve Bank of India (Department of Supervision) before reckoning the additions to capital funds. “Control” has been defined to mean right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner. “Large Exposure” (“LE”) means the sum of all exposure values of a NBFC-UL to a counterparty and/ or a group of connected counterparties, if it is equal to or above 10 percent of the NBFC-UL’s eligible capital base.
·????????The guidelines shall be applicable to NBFC-UL, both at the solo level and at the consolidated (group) level. Exposure shall comprise both on and off-balance sheet exposures by the NBFC-UL.
·????????Exposures exempted from LEF are exposure to the Government of India and State Governments which are eligible for zero percent risk weight under capital regulations, Exposure where the principal and interest are fully guaranteed by the Government of India, NBFC-UL’s exposure to group entities that is deducted from its Owned Funds to arrive at the NOF, Investment in the equity capital of the insurance company to the extent specifically permitted in writing by the Bank.
·????????For a single counterparty, the sum of all the exposure values of an NBFC-UL to a single counterparty must not be higher than 20 percent of the NBFC-UL’s available eligible capital base at all times. The Board of the NBFC-UL may allow additional 5 percent exposure beyond 20 percent but at no time higher than 25% of the NBFC-UL’s eligible capital base, subject to the condition that NBFC-UL has a policy approved by its board of directors setting out conditions under which exposure beyond 20% may be considered; and NBFC-UL shall record in writing the exceptional reasons for which exposure beyond 20% is being allowed in a specific case. An Infrastructure Finance Company (IFC) may further exceed the exposure limit by 5 percent of Tier I capital for exposure to a single counterparty. However single counterparty limit shall not exceed 25% in any case for NBFC-UL (other than IFC) and 30% for NBFC-UL(IFC).
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·????????For group of connected counterparties, the sum of all exposure values of an NBFC-UL to a group of connected counterparties shall not be higher than 25 percent of the NBFC-UL’s available eligible capital base at all times. An IFC may exceed the exposure limit by 10 percent of its Tier I capital for exposure to a group of connected counterparties and an NBFC-UL may exceed the exposure limit by 10 percent of its Tier I capital for exposure to a group of connected counterparties, if the additional exposure is on account of infrastructure ‘loan and/ or investment’.
·????????There may be situations where the control relationship and economic interdependence are interlinked. Therefore, one group of connected counterparties could include both types of factors in such a way that all relevant counterparties constitute a single risk for the NBFC-UL. Risk of contagion is present irrespective of type of connectedness (i.e. control or economic interdependence) between counterparties. NBFC-UL should assess counterparties with a view to identifying the chain of contagion leading to possible default of all entities.
·????????An exposure to a counterparty shall constitute both on and off-balance sheet exposures which shall be calculated according to the method prescribed for capital computation in Master Direction - Non-Banking Financial Company Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016. The exposures shall be permitted to be offset with credit risk transfer instruments permitted in the aforesaid directions.
·????????Any breach of Large Exposure limits shall be under exceptional conditions beyond the control of NBFC-UL, and it shall be reported to RBI (Department of Supervision, Central Office) immediately and rapidly rectified. NBFC-UL cannot undertake any further exposure (at the entity or group level, as the case may be) until it is brought down within the limit. Failure to comply with the exposure limit may lead to imposition of penalties on the NBFC-ULs by the supervisor.
·????????NBFC-UL shall report its Large Exposures to the Reserve Bank (Department of Supervision, Central Office) as per the reporting template given in Appendix 1. These instructions will be applicable from October 1, 2022.