The Reserve Bank of India (RBI) has allowed non-banking financial companies classified as middle layer and base-layer entities to utilise credit risk mitigation tools to offset their exposure with eligible credit risk transfer instruments.
The move aims to harmonise norms across non-bank lenders. Currently, only upper-layer NBFCs in the large exposure framework are allowed to use credit risk mitigation instruments to reduce their exposure to counterparty.
“With a view to harmonise the aforesaid norms among NBFCs, it has been decided to permit NBFCs in the ML and BL to offset their exposures with eligible credit risk transfer instruments. The instructions in this regard shall be issued shortly,” RBI governor Shaktikanta Das said.
The central bank will shortly issue instructions on the credit concentration norms.
The extension of the offsetting of the credit concentration norms for NBFCs in the middle layer and base layer can have significant implications. If the guidelines for the middle and base layer mirror the framework provided for the upper layer, NBFCs will be able to offset exposures with credit risk transfer instruments such as cash margin, central government guaranteed claims, and hedged corporate bonds.
If an NBFC enters into a credit risk transfer agreement with a counterparty, it can offset its exposure against the counterparty by the amount of the credit risk transferred and such offset amount shall then reflect on the credit risk transfer instrument provider, say experts.
“The extension of offsetting exposure norms would also assist in limiting exposures to a single entity or group,” Siddharth Srivastava, partner, Khaitan & Co, said.
“Given the rising cost of capital due to elevated inflation and interest rates, capital planning and efficient capital allocation are aspects that balance sheet-based lending organisations are focusing on,” said Vivek Iyer, partner, financial services – risk, Grant Thornton Bharat. “At a time like this, the RBI decision to offset exposures of original counterparty with select credit risk instruments helps release capital for NBFCs, thereby allowing more room for adding assets under management.”