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Making shadow lenders more accountable: RBI makes disclosure of exposures must for NBFCs

NBFCs will have to make disclosures with respect to exposure to real estate, capital markets and group companies

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They will also be required to report their sector-wise outstandings in a format similar to one that is currently applied to banks.

Non-banking financial companies (NBFCs) must report their real estate exposures and exposures to the capital markets and group companies, Reserve Bank of India (RBI) said on Tuesday, putting out specific disclosure norms for these intermediaries. The regulator also laid down a large exposures framework (LEF) for upper layer NBFCs and infrastructure finance companies.

All categories of NBFCs will have to make specific disclosures in their annual financial statements with respect to their direct and indirect exposure to the real estate sector, including securitised exposures, as well as details of their capital market exposures. They will also be required to report their sector-wise outstandings in a format similar to one that is currently applied to banks.

NBFCs will have to disclose the total amount of intra-group exposures, the total amount of top 20 intra-group exposures and the percentage of intra-group exposures to the total exposure. Further, they will be required to report details of their un-hedged foreign currency exposures and disclose the policies to manage currency-induced risks. Detailed disclosures of related party transactions and customer complaints will also be required of all categories of NBFCs.

Under the LEF, the exposure of an upper layer NBFC (excluding infrastructure finance companies) to a single counterparty must not be higher than 20% of its available eligible capital base. Subject to board approval, an additional 5% exposure beyond 20% may be allowed. For a group of connected counterparties, the exposure shall be capped at 25%, with an option to raise it to 35% in case of an infrastructure loan or investment. Infrastructure finance companies in the upper layer will be allowed a 25% exposure to a single counterparty, with the option to raise it to 30% with the board approval. An infrastructure finance company’s exposure to a group will be capped at 35%.

As per the scale-based regulatory framework for NBFCs which comes into force on October 1, 2022, the upper layer will consist of those NBFCs which are specifically identified by the RBI as warranting enhanced regulatory requirements based on a set of parameters. The middle layer shall consist of all deposit-taking NBFCs, non-deposit-taking NBFCs with asset size of Rs 1,000 crore and above as well as standalone primary dealers, infrastructure debt funds, core investment companies, housing finance companies and infrastructure finance companies. All other NBFCs shall occupy the base layer.

NBFCs shall disclose comparative information in respect of the previous period for all amounts reported in the current period’s financial statements. Further, NBFCs shall include comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements,” the RBI said.

There will be specific guidelines governing loans to directors in the case of NBFCs in the upper and middle layers. Unless sanctioned by the board, such NBFCs shall not grant loans of Rs 5 crore or more to their directors, relatives of directors or companies with which a director may have a relationship. Loans given to senior officers shall be reported to the board and no senior officer shall be involved in sanctioning any credit facility to their own relatives. NBFCs in the base layer shall have a board-approved policy on grant of loans to directors, senior officers and relatives of directors and to entities where directors or their relatives have major shareholding.

While appraising loan proposals involving real estate, upper and middle layer NBFCs shall ensure that borrowers have obtained prior permission from the government and other statutory authorities for the project, wherever required. “To ensure that the loan approval process is not hampered on account of this, while the proposals may be sanctioned in normal course, the disbursements shall be made only after the borrower has obtained requisite clearances from the government/other statutory authorities,” the RBI said.

Upper and middle layer NBFCs will have to make disclosures relating to corporate governance, including details of composition of the board, general body meetings as also penalties and strictures imposed by the RBI or other statutory authorities. They shall disclose all instances of breach of covenant of loans availed or debt securities issued, and details of divergence between provisioning and bad loans assessed by the company and regulators, if such divergence exceeds 5%.

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