The Reserve Bank of India has issued draft guidelines for the NBFC sector with an aim to tighten the norms for corporate governance and the provisioning requirements – thus putting them on par with the commercial banks. The draft guidelines are based on recommendations made by the working group chaired by Usha Thorat, the former deputy governor of the RBI.

The draft revised guidelines relate to entry point norms, principal business criteria, prudential regulations, liquidity requirements for NBFCs and corporate governance.

The report of the working group was placed on the RBI website in back in August 2011.

Currently, the regulatory system for the NBFCs is more lenient than that of the commercial banks in India and differs from the banks in many ways. Moreover, the steady increase in banks’ credit to NBFCs over the recent years also indicates that the possibility of risks being transferred from the not-so-stringently regulated NBFC sector to the banking sector can no longer be ruled out by the RBI.

On Tier I Capital, it has been proposed that the requirement should be increased from 7.5 per cent to 10 per cent for all NBFCs while Tier 1 capital for captive financiers has been proposed to be increased to 12 per cent from the current 7.5 per cent. A period of three years will be allowed to comply with these norms.

According to analysts, this is a positive move, especially for listed asset-financing NBFCs and infra finance companies, as the working group recommendation has proposed 12 per cent Tier I capital for these NBFCs. In short term, the move is positive for relatively lower capital NBFCs like Magma and Cholamandalam Finance.

On the provisioning norms, the period for classifying loans into NPA (non-performing asset) is to be decreased to 120 days by FY14 and to 90 days by FY15, from the current 180 days, for all NBFCs. The working group has also recommended a 90-day NPA recognition norm and a one-time adjustment of repayment schedule is to be allowed for the same. Further, a standard asset provisioning of 40 bps is to be provided, higher than the 25 bps at present. The government-owned NBFCs also have to provide for the same at the earliest.

This move will reduce the regulatory arbitrage between the banks and the NBFCs. While a reduced NPA recognition will negatively impact the earnings of NBFCs, the process is likely to be non-disruptive as the RBI has provided two years’ time for the same.

Other key changes include increased risk weightage for commercial real estate and capital market exposure. NBFCs should take prior approval from the RBI when there is a change of control and/or increase in shareholding to the extent of 25 per cent or in excess thereof, of the paid-up equity capital of the company by individuals or groups, directly or indirectly. The disclosures mandated in the guideline are similar to the requirements by banks.

Also, NBFCs, with asset size of Rs 1,000 crore and above, will need to comply with mandatory disclosures under Clause 49 of the SEBI listing agreement, irrespective of whether they are listed or not. Additionally, they will need to disclose their provision coverage ratio, liquidity ratio, asset liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off-balance sheet exposures, structured products issued by them, as well as securitisation/assignment transactions and other disclosures.

(Edited by Sanghamitra Mandal)

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