The Reserve Bank of India has issued a notification on “Credit/Investment Concentration Norms – Credit Risk Transfer”.

 Background:

The guidelines on Large Exposures Framework (LEF) are applicable to NBFC-Upper Layer (NBFC-UL). The NBFC-Base Layer (NBFC-BL) and NBFC-Middle Layer (NBFC-ML) are, however, governed by the credit/investment concentration norms. In order to ensure uniformity and consistency in computation of concentration norms among NBFCs, a review of the extant concentration norms has been carried out and the present Notification been issued.

Key Takeaways:

1. Regulations for NBFC-ML:

A. Computation of exposure – Credit Risk Transfer Instruments:

Aggregate exposure to a counterparty comprising both on and off-balance sheet exposures are calculated based on the method prescribed for capital computation in MD on NBFC and MD on HFC; i.e., on-balance sheet exposures are reckoned at the outstanding amount1 while the off-balance sheet exposures are converted into credit risk equivalent by applying the credit conversion factor prescribed under capital requirements. Henceforth, the exposures of NBFC-ML shall also be offset with credit risk transfer instruments listed below:

• Cash margin/caution money/security deposit held as collateral on behalf of the borrower against the advances for which right to set off is available;
• Central Government guaranteed claims which attract 0 per cent risk weight for capital computation;
• State Government guaranteed claims which attract 20 per cent risk weight for capital computation
• Guarantees issued under the Credit Guarantee Schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and individual schemes under National Credit Guarantee Trustee Company Ltd (NCGTC) subject to meeting the conditions of circular on ‘Review of Prudential Norms – Risk Weights for Exposures guaranteed by Credit Guarantee Schemes (CGS)’ dated September 07, 2022, as amended from time to time.

Please note, to be eligible as a credit risk transfer instrument, guarantees have to be direct, explicit, irrevocable and unconditional.

B. Exemptions from credit/investment concentration norms:

In addition to the exposures already exempted from credit/investment concentration norms in terms of paragraph 91 of MD on NBFC and paragraph 20 of MD on HFC, exposures listed below shall also be exempt from credit/investment concentration norms:

• Exposure to the Government of India and State Governments which are eligible for zero percent risk weight under capital regulations applicable to NBFC
• Exposure where the principal and interest are fully guaranteed by the Government of India

Disclosure: The exposures where the NBFC has exceeded the prudential exposure limits during the year are required to be disclosed in the Notes to Accounts in the annual financial statements. Henceforth, computation of exposure limit for disclosure requirements has to be reckoned as per the present circular.

B. Regulations for NBFC-BL:

NBFC-BL have to put in place an internal Board approved policy for credit/investment concentration limits for both single borrower/party and single group of borrowers/parties. Computation of exposure have to be on similar lines as that for NBFC-ML as provided in the present Notification.

Please refer to the hyperlinked document below for a detailed read of the Notification.

Source: Reserve Bank of India

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