The Reserve Bank of India on Friday issued a final set of strict, bank-like rules for the non-bank finance sector to ensure better monitoring and prevent any failure from impacting the rest of the financial world.
The central bank has gradually moved towards stricter norms for non-banking finance companies (NBFCs) since the collapse of one of the largest firms – Infrastructure Leasing and Financial Services – in late 2018 amid allegations of fraud.
The following year Dewan Housing Finance Corp and Altico Capital defaulted on payments, while Shrey Infrastructure Finance joined the list of defaulters in 2021.
“Many entities have evolved and become systemically important and hence there is a need for NBFCs to align the regulatory framework keeping in view their changing risk profiles,” RBI said.
The new structure will have a four-tier structure with strict regulations in the top two tiers with only 25 to 30 out of over 9,000 NBFCs.
“The top layer would ideally be empty. This layer may be populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the upper layer. Such NBFCs will move from the top layer to the top layer, RBI said.
The central bank said NBFCs not using public funds or exposed to consumer funds have a different risk profile and require separate regulatory treatment and the RBI will frame separate rules for them.
It also said that direct and indirect exposure to the capital market as well as commercial real estate would be considered as sensitive areas for NBFCs and firms would be required to set separate board-approved internal limits for such exposures. would be required.
It also set a limit of Rs 100 million per borrower for subscription financing for initial public offerings and allowed individual firms to set an even more conservative limit if they so desired. The central bank said the IPO funding ceiling will be effective in April.