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Credit / Investment Concentration Norms and Large Exposures Framework for NBFCs

Reserve Bank of India (RBI) has updated the credit / investment concentration norms and credit risk transfer guidelines for Non-Banking Financial Companies (NBFCs).

How are credit / investment concentration norms and large exposures framework applicable to NBFCs?

Type of NBFC Guidelines applicable
Credit / investment concentration norms
NBFC-Upper Layer (NBFC-UL) Large Exposures Framework (LEF)

How shall exposure be computed?

Aggregate exposure to a counterparty comprising both on and off-balance sheet exposures are calculated based on the method prescribed for capital computation i.e., 

  • On-balance sheet exposures are reckoned at the outstanding amount.
  • Off-balance sheet exposures are converted into credit risk equivalent by applying the credit conversion factor prescribed under capital requirements. 

What credit / investment concentration norms are applicable to NBFC-BL?

  • An NBFC which is held by a Non-Operative Financial Holding Company (NOFHC) shall not –
    • 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.
    • Make investment in the equity / debt capital instruments in any of the financial entities under the NOFHC.
    • Invest in equity instruments of other NOFHCs.
  • NBFC-BL shall put in place an internal Board approved policy for credit / investment concentration limits for both single borrower / party and single group of borrowers / parties.

What credit / investment concentration norms are applicable to NBFC-ML?

Exposure limits

  • NBFC (except NBFC-IFC) shall have exposure (credit / investment taken together) as below –

Type of exposure Ceiling for exposure Additional limit for exposure
Single party 25% of its Tier 1 capital 5%* of its Tier 1 capital
Single group of parties 40% of its Tier 1 capital 10%* of its Tier 1 capital
*If the additional exposure is on account of infrastructure loan and /or investment

  • NBFC-IFC shall have exposure (credit / investment taken together) as below –

Type of exposure Ceiling for exposure
Single party 30% of its Tier 1 capital
Single group of parties 50% of its Tier 1 capital

  • Housing Finance Company (HFC) shall have exposure (credit / investment taken together) as below –

Type of exposure Ceiling for exposure
Single party 25% of its Tier 1 capital
Single group of parties 40% of its Tier 1 capital
Within the overall ceiling, investment of a HFC in the shares of another HFC (other than its subsidiaries) shall not exceed 15% of the equity capital of the investee company.

  • The ceiling on the investment in shares of another company shall not be applicable in respect of investment in the equity capital of an insurance company up to the extent specifically permitted, in writing, by RBI.
  • Exposure norms shall not apply to any NBFC not accessing public funds in India, either directly or indirectly and not issuing guarantees.
  • NBFC shall formulate a policy in respect of exposures to a single party / a single group of parties.
  • Government NBFCs set up to serve specific sectors may approach RBI for exemptions, if any.

Exemptions from exposure norms

Existing Norms Revised Norms
Exposure norms shall not apply to the following to the extent they have been reduced from Owned Funds for the calculation of Net Owned Fund (NOF).
  • Investments in shares of – (a) its subsidiaries; (b) companies in the same group.
  • Book value of debentures, bonds, outstanding loans and advances (including hire purchase and lease finance) made to, and deposits with – (a) subsidiaries of the company; and (b) companies in the same group.
 In addition to the exposures already exempted from credit / investment concentration norms, 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 0% risk weight under capital regulations applicable to NBFC.
  • Exposure where the principal and interest are fully guaranteed by the Government of India.

Credit risk transfer instruments

Existing Norms Revised Norms
Credit default swaps (CDS) are currently allowed as credit risk transfer instruments for offsetting exposure to the underlying counterparty. In addition to CDS, the exposures shall also be offset with the following credit risk transfer instruments –
  • 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% risk weight for capital computation.
  • State Government guaranteed claims which attract 20% 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).
To be eligible as a credit risk transfer instrument, guarantees shall be direct, explicit, irrevocable and unconditional.

What is Large Exposure Framework (LEF) applicable to NBFC-UL?

  • The Large Exposure Framework (LEF) shall be applicable to NBFCs, both at the solo level and at the consolidated (group) level. 
  • The LEF ceiling for NBFC (other than NBFC-IFC) shall be as below –

Type of exposure Ceiling for exposure Additional limit for exposure
Single Counterparty 20% of eligible capital base 5%* of eligible capital base 5%** of eligible capital base
Single counterparty limit shall not exceed 25% of eligible capital base in any case
Group of connected counterparties 25% of eligible capital base 10%** of eligible capital base
* With Board approval.
** If the additional exposure is on account of infrastructure loan and /or investment.

  • The LEF for NBFC-IFC shall be as below –

Type of exposure Ceiling for exposure Additional limit for exposure
Single Counterparty 25% of eligible capital base Additional 5%* of eligible capital base
Group of connected counterparties 35% of eligible capital base NA
* With Board approval.

Exemption from LEF

The following exposures are exempted from the LEF –

  • Exposure to the Government of India and State Governments which are eligible for 0% risk weight under capital regulations applicable to NBFC.
  • Exposure where the principal and interest are fully guaranteed by the Government of India.
  • NBFC’s exposure to group entities that is deducted from its Owned Funds to arrive at the NOF.
  • Investment in the equity capital of the insurance company to the extent specifically permitted in writing by RBI.

Credit risk transfer instruments

  • The exposures shall be permitted to be offset with the following credit risk transfer instruments –
    • Cash margin / caution money / security deposit against which right to set off is available, held as collateral against the advances.
    • Central Government guaranteed claims which attract 0% risk weight for capital computation.
    • State Government guaranteed claims which attract 20% risk weight for capital computation.
    • 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 can 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 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 ‘cash margin / caution money / security deposit’ and ‘Central Government guaranteed claims’ mentioned 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.
  • NBFC’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.
  • To be eligible as a credit risk transfer instrument, guarantees shall be direct, explicit, irrevocable and unconditional.


References

Reserve Bank of India. (2021, February 17). 'Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12030

Reserve Bank of India. (2021, February 17). 'Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 (Updated as on December 15, 2023)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12030

Reserve Bank of India. (2023, October 19). 'Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023'. Retrieved from https://rbidocs.rbi.org.in/rdocs/content/pdfs/106MDNBFCs19102023_ANN.pdf

Reserve Bank of India. (2023, October 19). 'Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (Updated as on November 10, 2023)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550

Reserve Bank of India. (2024, January 15). 'Credit/Investment Concentration Norms – Credit Risk Transfer'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12598&Mode=0


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