Not more than 25-30 large non-bank lenders will be constituents of the upper levels of the pyramid, according to the RBI discussion paper released on Friday. Norms will get more stringent as the NBFCs get bigger toward the apex. Those in the upper tier could include Housing Development Finance Corp. (HDFC), Bajaj Finance, Shriram Capital, Tata Capital and Mahindra & Mahindra Financial Services.
The regulator has sought feedback on the proposals before finalising norms.
The discussion paper on a revised regulatory framework for NBFCs outlines a “base layer, middle layer, upper layer and a possible top layer.” No NBFC will be classified in this top layer unless the risk perception rises to an acute level.
“NBFCs in lower layer will be known as NBFC-Base Layer (NBFC-BL),” the RBI paper said. “NBFCs in middle layer will be known as NBFC-Middle Layer (NBFC-ML). An NBFC in the Upper Layer will be known as NBFC-Upper Layer (NBFC-UL) and will invite a new regulatory superstructure. There is also a Top Layer, which is ideally supposed to be empty.”
The paper elaborated on the top layer.
“The layer can get populated in case the Reserve Bank takes a view that there has been unsustainable increase in the systemic risk spill-overs from specific NBFCs in the Upper Layer,” it said. “NBFCs in this Layer will be subject to higher capital charge, including Capital Conservation Buffers.”
The regulator has also proposed common equity tier-1 capital requirements of 9% for NBFCs in the upper layer as well as similar standard asset provision norms. Both these measures could significantly increase capital requirements, although most large NBFCs are well capitalised.
“It is felt that CET 1 could be introduced for NBFC-UL to enhance the quality of regulatory capital,” the RBI paper said. “In order to tune regulatory framework for NBFC-upper layer to greater sensitivity, it is suggested that they are prescribed differential standard asset provisioning on lines of banks.”
NBFC entry norms are proposed to be tightened with the minimum net owned funds requirement to increase 10-fold from Rs 2 crore to Rs 20 crore. The RBI paper also proposed harmonising bad asset identification between banks and NBFCs by bringing classification down to 90 days from 180 days.
Importantly, the regulator has also proposed mandatory listing requirements for NBFCs in the upper layer on the lines of private banks. The RBI has also proposed increasing the threshold level of systemically important NBFCs to Rs 1,000 crore from the present Rs 500 crore.