The Reserve Bank of India (RBI) on April 19, 2022 has issued the guidelines for Large Exposures Framework for Non-Banking Financial Company - Upper Layer to aim at addressing credit risk concentration in NBFCs. These instructions set out to identify large exposures, refine the criteria for grouping of connected counterparties and put in place reporting norms for large exposures.
• Scope of the application :
o The guidelines shall be applicable to NBFC-UL, both at the solo level and at the consolidated (group) level.
o Exposure shall comprise both on and off-balance sheet exposures by the NBFC- UL.
• Scope of counterparties and exemptions
o NBFC-UL’s exposure to all its counterparties and groups of connected counterparties, excluding the exposures listed below, will be considered for exposure limits. The exposures that are exempted from the LEF are listed below:
a) Exposure to the Government of India and State Governments which are eligible for zero percent risk weight under capital regulations applicable to NBFC-UL;
b) Exposure where the principal and interest are fully guaranteed by the Government of India;
c) NBFC-UL’s exposure to group entities that is deducted from its Owned Funds to arrive at the NOF.
d) Investment in the equity capital of the insurance company to the extent specifically permitted in writing by the Bank.
o Exposures shall be permitted to be offset with credit risk transfer instruments as per principle indicated at paragraph 6.1 of the Annex and the indicative list of such instruments is provided below:
a) Cash margin/ caution money/ security deposit against which right to set off is available, held as collateral against the advances;
b) Central Government guaranteed claims which attract 0% risk weight for capital computation;
c) State Government guaranteed claims which attract 20% risk weight for capital computation;
d) For corporate bonds held in current category and hedged by Credit Default Swap (CDS), where there is no mismatch between the CDS and the hedged bond, the credit protection has been permitted to be recognised to a maximum of 80% of the exposure hedged. The remaining 20% of the exposure shall be recognised on the original counterparty. For corporate bonds held in permanent category and hedged by CDS where there is no mismatch between the CDS and the hedged bond, the NBFC-UL can recognise full credit protection for the underlying asset. The exposure of the original counterparty shall stand fully substituted by the exposure to the protection seller.
Except for 4.2 (a) and (b) above, in all other cases where exposure to the original counterparty is reduced on account of an eligible credit risk transfer instrument provided by another counterparty for that exposure, it needs to be recognized as an exposure to that extent on the credit risk transfer instrument provider.
o Where two (or more) entities falling outside the scope of the sovereign exemption are controlled by or are economically dependent on an entity that falls within the scope of the sovereign exemption {paragraph 4.1(a)}, and are otherwise not connected, those entities will not be deemed to constitute a group of connected counterparties.
o NBFC-UL’s exposure to an exempted entity which is hedged by a credit derivative shall be treated as an exposure to the counterparty providing the credit protection notwithstanding the fact that the original exposure is exempted.
o NBFC-UL which is held by an NOFHC shall not
a) have any exposure (credit and investments including investments in the equity/ debt capital instruments) to the Promoters/ Promoter Group entities or individuals associated with the Promoter Group or the NOFHC;
b) Make investment in the equity/ debt capital instruments in any of the financial entities under the NOFHC;
c) Invest in equity instruments of other NOFHCs.
Explanation: For the purposes of this paragraph, the expression, “Promoter” and Promoter group” shall have the meaning assigned to those expressions in the “Guidelines for licensing of New Banks in the Private Sector” issued by the Bank.
• Regulatory reporting
NBFC-UL shall report its Large Exposures to the Reserve Bank (Department of Supervision, Central Office) as per the reporting template given in Appendix 1. The LEF reporting shall cover the following:
a) all exposures, meeting the definition of large exposure;
b) all other exposures, measured as specified in paragraph 6 of this framework without offsetting exposure value with credit risk transfer instruments, where values stand equal to or above 10 percent of the NBFC-UL’s eligible capital base;
c) all the exempted exposures with values equal to or above 10 percent of the NBFC-UL’s eligible capital base;
d) 10 largest exposures included in the scope of application, irrespective of the values of these exposures relative to the NBFC-UL’s eligible capital base.
• Implementation date and transitional arrangements
These instructions will be applicable from October 1, 2022. Once NBFC-UL is subject to LEF, credit concentration norms in respect of single/ group of borrowers contained in Master Direction - Non-Banking Financial Company - Systemically Important Non- Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 shall no longer be applicable to NBFC-UL.
*Disclaimer – Kindly Find the detailed guidelines in the attached document.
[Notification No. RBI/2022-23/32 DOR.CRE.REC.24/21.01.003/2022-23]
