RBI widens norms to help NBFCs cut risk on big loans

The intent behind the large exposure framework is essentially to limit the exposures to a single entity or group as it poses a potentially higher risk in case of a business setback

Mumbai: The Reserve Bank of India (RBI) has decided to permit NBFCs in the middle layer (ML) and bottom layer (BL) to offset their exposures with eligible credit risk transfer instruments, a facility that is currently available only to NBFCs in the upper layer (UL).

The extant guidelines on Large Exposure Framework for Non-Banking Financial Company-Upper Layer (NBFC-UL) permits exposures to the original counterparty to be offset with certain credit risk transfer instruments.

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“However, the extant credit concentration norms for NBFC in the ML and BL do not explicitly envisage any such mechanism. With a view to harmonize the aforesaid norms among NBFCs, it has been decided to permit NBFCs in the ML and BL as well, to offset their exposures with eligible credit risk transfer instruments. The instructions in this regard shall be issued shortly,” the RBI said on Friday.

The intent behind the large exposure framework is essentially to limit the exposures to a single entity or group as it poses a potentially higher risk in case of a business setback. Banks and non-banking financial companies should strengthen their risk management strategies and develop stronger underwriting standards to tackle stress in these loans, RBI Governor Shaktikanta Das said while presenting the monetary policy statement on Friday.

He emphasised the need for banks to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest.

However, he said, “The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth, and robust earnings growth.”He also expressed satisfaction with the “very high growth” in personal loans in the banking system.