RBI Allows Middle Layer NBFCs To Use Credit Risk Transfer Instruments

The Reserve Bank of India has permitted middle layer non-bank financial companies to use credit risk transfer instruments.

NBFC-ML will now be able to use these instruments to compute exposure, according to the circular released on Monday.

The Large Exposures Framework was earlier only applicable on upper layer NBFCs.

But with this extension, credit risk transfer instruments like cash margin/caution money/security deposit, central government and state government guaranteed claims will be allowed to NBFC-ML too.

In order to be eligible as a credit risk transfer instrument, the RBI has said that guarantees shall be direct, explicit, irrevocable and unconditional.

Apart from the existing exemptions, the following would also be exempted from credit concentration norms:

• Exposure to the government of India and state governments, which are eligible for 0% risk weight under capital regulations applicable to NBFCs.

• Exposure where the principal and interest are fully guaranteed by the Government of India.

The regulator has asked base layer NBFCs to have an internal board approved policy in place for credit/investment concentration limits. These would be applicable for both single borrower/party and single group of borrowers/parties.

In the monetary policy address on Oct. 6, RBI Governor Shaktikanta Das said that the central bank's idea behind extending these tools is to ‘harmonise’ the rules for all NBFCs.

NDTV Profit previously reported that middle and base layer NBFCs will be able to offset their exposure against the counterparty, which will help them in releasing more capital.