Money & Banking

RBI caps IPO funding by NBFCs at ₹1 cr per borrower

Our Bureau Mumbai | Updated on October 22, 2021

Issues scale-based regulatory framework

The Reserve Bank of India on Friday announced a scale-based regulation of non-banking finance companies, which include a ceiling on IPO funding per borrower as well as changes in the minimum net owned fund, classification of non-performing assets, and capital requirements.

Under the new framework, there will be a ceiling of ₹1 crore per borrower for financing subscription to an initial public offering (IPO).

“NBFCs can fix more conservative limits,” the RBI said in the ‘Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs’.

Layer-based structure

While the overall guidelines shall be effective from October 1, 2022, the instructions relating to the ceiling on IPO funding will come into effect from April 1, 2022.

Under the new framework, the regulatory structure for NBFCs shall comprise four layers based on their size, activity, and perceived riskiness — base, middle, upper and top layer.

The RBI had issued a discussion paper on the topic in January this year and had sought public comments on it.

Sensitive exposure

In the discussion paper, the central bank noted that IPO financing by individual NBFCs has come under close scrutiny, more for their abuse of the system.

“While there is a limit of ₹10 lakh for banks for IPO financing, there is no such limit for NBFCs,” it had pointed out while mooting the proposal for the ₹1-crore cap.

In the new framework, the RBI has also proposed sensitive sector exposure norms for NBFCs in the middle and upper layers. “Exposure to the capital market (direct and indirect) and commercial real estate shall be reckoned as sensitive exposure for NBFCs. NBFCs shall fix board-approved internal limits for SSE separately for capital market and commercial real estate exposures,” the RBI said. A sub-limit within the commercial real estate exposure ceiling shall be fixed internally for financing land acquisition.

Housing finance companies shall continue to follow specific regulations on sensitive sector exposure, it added.

Further, the regulatory minimum net owned fund (NOF) for NBFC-Investment and Credit Companies, NBFC-MFI and NBFC-Factors shall be increased to ₹10 crore by March 2027 through a prescribed glide path.

The extant NPA classification norm also stands changed to the overdue period of more than 90 days for all categories of NBFCs. A glide path is provided to NBFCs in the base layer to adhere to the 90 days NPA norm, the RBI said.

Considering the need for professional experience in managing the affairs of NBFCs, the RBI said at least one of the directors should have relevant experience of having worked in a bank or an NBFC.

“Over the years, the sector has undergone considerable evolution in terms of size, complexity, and inter-connectedness within the financial sector. Many entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile,” the RBI said.

Published on October 22, 2021

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