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The sum of all the exposure values of a Non-Banking Finance Company (NBFC) placed in the Upper Layer (UL), to a single counterparty and to a group of connected counterparties, must not be higher than 20 per cent and 25 per cent, respectively, of its available eligible capital base at all times, according to the Reserve Bank of India (RBI).
However, an infrastructure finance company (IFC) which is classified as an NBFC-UL, can exceed the aforementioned limits by 5 per cent of its Tier-I capital for exposure to a single counterparty, and by 10 per cent of its Tier-I capital for exposure to a group of connected counterparties.
Further, an NBFC-UL may exceed the exposure limit by 5 per cent of its Tier I capital for exposure to a single counterparty, if the additional exposure is on account of infrastructure ‘loan and/ or investment’.
However single counterparty limit shall not exceed 25 per cent in any case for NBFC-UL (other than IFC) and 30 per cent for NBFC-UL (IFC), per RBI’s Large Exposures Framework for NBFC-UL.
An NBFC-UL may exceed the exposure limit by 10 per cent of its Tier-I capital for exposure to a group of connected counterparties, if the additional exposure is on account of infrastructure ‘loan and/ or investment’.
Enhanced regulation
Under Scale Based Regulations for NBFCs, the Upper Layer (UL) shall comprise of those NBFCs which are specifically identified by the Reserve Bank 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.
Investing in insurance
Interestingly, RBI has exempted from the large exposures framework an NBFC-UL’s investment in the equity capital of an insurance company to the extent specifically permitted in writing by the regulator. This may encourage NBFCs to invest in insurance companies.
Exposures shall be permitted to be offset with credit risk transfer instruments such as cash margin/ caution money/ security deposit against which right to set off is available, held as collateral against the advances; Central government guaranteed claims which attract 0 per cent risk weight for capital computation, among others.
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