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RBI tightens rules for shadow banks to mitigate risk in India's financial sector

11 Nov 2014 Evaluate

With an objective to mitigate risk in the sector, the Reserve Bank of India (RBI) has tightened rules for NBFCs, also known 'shadow banks', by raising capital adequacy requirement and net owned fund limit, among others. India’s Apex Bank also has restricted deposits with a set of changes that it hopes will protect consumers and the market without stifling growth.

As per the latest directives, the RBI has raised the limit for NBFCs to maintain the Net Owned Fund (NOF) requirement to four times by 2017 to Rs 2 crore. Prior to this, the NOF requirement stood at Rs 25 lakh. NBFCs, in a phased manner, would be required to raise it to Rs 1 crore by March 2016 and further double it to Rs 2 crore by 2017.

Also, it directed NBFCs, primarily engaged in lending against gold jewellery, to maintain a minimum tier I capital (or equity capital) of 12% with effect from April 1, 2014 as against existing requirement of 10%. For deposit and non-deposit taking NBFCs, Capital to Risk (Weighted) Assets Ratio or CRAR, which includes tier I capital of 7.5%, stands at 15% at present. But as per new rules, NBFCs have to raise the tier I capital to 8.5% by end of March 2016 and 10 percent by March 31, 2017.

On provisioning front, RBI has ordered NBFCs to raise provisioning of standard assets to 0.3% by end of March 2016; 0.35% by March 2017 and to 0.4% by end of March 2018. At present, every NBFC is required to make a provision for standard assets at 0.25% of the outstanding. Importantly, to create a level playing field, RBI has mandated similar asset classification norms for NBFCs-ND-SI and NBFCs-D as that for banks.

Further, tightening the loop, RBI has mandated that NBFCs failing to achieve the prescribed ceiling within the stipulated time period would not be eligible to hold the CoR (Certificate of Registration) as NBFCs.

According to RBI, NBFCs being financial entities are as exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movement and risks pertaining to liquidity and solvency, as any other financial sector player. This risk, therefore needs to be addressed by RBI, without impeding the dynamism displayed by NBFCs in delivering innovation and last mile connectivity for meeting the credit needs of the productive sectors of the economy.

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RBI tightens rules for shadow banks to mitigate risk in India's financial sector

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