RBI unveils large exposures framework for upper layer for NBFCs
- Apr 20, 2022, 03.30 PM
- DealMoney News Service
Reserve Bank of India (RBI) has unveiled large exposures framework for upper layer Non-Banking Financial Company (NBFC).
Large Exposure means the sum of all exposure values of a NBFC-UL measured in terms of paragraph 6 of these instructions, to a counterparty and/or a group of connected counterparties, if it is equal to or above 10 percent of the NBFC-UL’s eligible capital base.
RBI said that the sum of all exposure values of an NBFC-UL to a group of connected counterparties shall not be higher than 25 percent of the NBFC-UL’s available eligible capital base at all times, provided that an IFC may exceed the exposure limit by 10 percent of its Tier I capital for exposure to a group of connected counterparties and provided further that an NBFC-UL may exceed the exposure limit by 10 percent of its Tier I capital for exposure to a group of connected counterparties, if the additional exposure is on account of infrastructure ‘loan and/or investment’.
In establishing connectedness based on economic interdependence, NBFC-UL must consider, at a minimum, the following criteria where 50% or more of one counterparty's gross receipts or gross expenditure (on an annual basis) is derived from transactions with the other counterparty; where one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is so significant that the guarantor is likely to default if a claim occurs; where a significant part of one counterparty’s production/output is sold to another counterparty, which cannot easily be replaced by other customers; when the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loan may be serviced and fully repaid.
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 has been permitted to be recognised to a maximum of 80% of the exposure hedged, RBI said.
RBI further added that 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-UL 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, RBI said.
