The Reserve Bank of India (RBI) on Monday unveiled norms for provisioning for loans extended by large non-banking financial companies (NBFCs) in the wake of the expanding role played by NBFCs in retail lending. In the case of individual housing loans and loans by 'NBFC-Upper Layer' to small and micro enterprises (SMEs), the rate of provision has been specified at 0.25 per cent and for housing loans extended at teaser rates, it has been fixed at 2 per cent. The latter will decrease to 0.4 per cent after 1 year from the date on which the rates are raised, the RBI said in a circular. Under the RBI provisioning rules, banks have to put aside a minumum percentage of funds to cover anticipated losses in the future on account of lending. For Commercial Real Estate – Residential Housing (CRE - RH) sector, the rate of provision is 0.75 per cent, and for CRE, other than residential housing, it will be one per cent. 🚨 Limited Time Offer | Express Premium with ad-lite for just Rs 2/ day 👉🏽 Click here to subscribe 🚨 Further, the RBI said the rate of provision for restructure loans will as per the stipulation in the applicable prudential norms. The rate of provision for all other loans, including medium enterprises, has been fixed at 0.4 per cent. It also said the current credit exposures arising on account of the permitted derivative transactions will attract provisioning requirement as applicable to the loan assets in the 'standard' category, of the concerned counterparties. The upper layer comprises those NBFCs which are specifically identified by RBI as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor. In October 2021, the RBI had issued a framework for scale-based regulation for NBFCs. Regulatory structure for NBFCs comprise four layers based on their size, activity and perceived riskiness. Housing loans extended at teaser rates mean housing loans having comparatively lower rates of interest in the first few years after which the rates of interest are reset at higher rates, the RBI said. Current credit exposure is defined as the sum of the gross positive mark-to-market value of all derivative contracts with respect to a single counterparty, without adjusting against any negative marked-to-market values of contracts with the same counterparty. Loans for third dwelling unit onwards to an individual will be treated as CRE exposure. The RBI had recently cautioned that the higher risk appetite of non-banking finance companies (NBFCs) poses a potential threat to the financial stability. “The higher risk appetite of NBFCs has contributed over time to their size, complexity, and interconnectedness, thus making some of the entities systemically significant that pose potential threat to financial stability,” the RBI said in its Annual Report. Nearly a dozen NBFCs have expanded their balance sheets exponentially, mainly in the retail segment, prompting the RBI to bring down the regulatory arbitrage of NBFCs with banks and make them almost on par with banks. The central bank has been closely watching the top 50 NBFCs after the collapse of financial entities like IL&FS group, DHFL and Srei Infrastructure Finance in the last few years. It has since then strengthened on-site supervision and compliance of NBFCs as the failure of an NBFC will pose a threat to the banking system. This is because the total exposure of banks to NBFCs was Rs 10.54 lakh crore as on March 25, 2022, according to RBI data.
