The Reserve Bank of India (RBI) has issued detailed guidelines on credit/investment concentration norms and credit risk transfer for Non-Banking Financial Companies (NBFCs) under its Master Direction – Non-Banking Financial Company – Scale Based Regulation (MD on NBFC) and Master Direction – Non-Banking Financial Company – Housing Finance Company (MD on HFC). These instructions aim to ensure uniformity and consistency in the computation of concentration norms among NBFCs.
The Large Exposures Framework (LEF) guidelines are applicable to NBFC-Upper Layer (NBFC-UL) per paragraph 110 of the MD on NBFC. Meanwhile, NBFC-Base Layer (NBFC-BL) and NBFC-Middle Layer (NBFC-ML) follow the credit/investment concentration norms outlined in paragraphs 32 and 91 of the MD on NBFC, paragraph 20 of MD on HFC, and the circular on Scale Based Regulation (SBR) dated October 22, 2021. The RBI has reviewed and decided on new concentration norms to ensure uniformity.
Regulations for NBFC-Middle Layer (NBFC-ML)
Computation of Exposure – Credit Risk Transfer Instruments:
Aggregate exposure to a counterparty, including both on and off-balance sheet exposures, is calculated based on the capital computation method in MD on NBFC and MD on HFC. On-balance sheet exposures are reckoned at the outstanding amount, while off-balance sheet exposures are converted into credit risk equivalents using the prescribed credit conversion factor. As per Annex XIV of the MD on NBFC, credit default swaps (CDS) are permitted as credit risk transfer instruments for offsetting exposure to the underlying counterparty. NBFC-ML exposures can also be offset with the following credit risk transfer instruments:
- Cash margin, caution money, or security deposits held as collateral with the right to set off.
- Central Government guaranteed claims attracting 0% risk weight for capital computation.
- State Government guaranteed claims with a 20% risk weight for capital computation.
- Guarantees under schemes like CGTMSE, CRGFTLIH, and NCGTC, meeting the conditions specified in the circular on risk weights for exposures guaranteed by credit guarantee schemes.
To be eligible, guarantees must be direct, explicit, irrevocable, and unconditional.
Exemptions from Credit/Investment Concentration Norms:
In addition to already exempted exposures, the following are also exempt:
- Exposures to the Government of India and State Governments eligible for zero percent risk weight under applicable capital regulations.
- Exposures where the principal and interest are fully guaranteed by the Government of India.
Disclosure Requirements:
NBFCs must disclose in their annual financial statements any exposures that exceed prudential exposure limits during the year, per paragraphs 3.5.4 of Annex XXII of the MD on NBFC and 3.7.4 of Annex IV of the MD on HFC. The computation of exposure limits for disclosure purposes will follow the guidelines in paragraphs 3 and 4 of this circular.
Regulations for NBFC-Base Layer (NBFC-BL)
NBFC-BL must establish an internal Board-approved policy for credit/investment concentration limits for single borrowers/parties and single groups of borrowers/parties. The computation of exposure should follow the same guidelines as those for NBFC-ML.
Regulations for NBFC-Upper Layer (NBFC-UL)
Per paragraph 110.4.2 of MD on NBFC, credit risk transfer instruments must be direct, explicit, irrevocable, and unconditional to be eligible.
These instructions come into force immediately, with all other terms and conditions for LEF and credit/investment concentration norms remaining as per existing guidelines.
