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RBI releases report of the working group on NBFC sector
The RBI has proposed new regulations for non-banking finance firms (NBFCs), mostly
centered on minimising the regulatory arbitrage opportunities available to NBFCs as
compared to banks. One of the major changes proposed by the RBI is brining the capital
adequacy requirements and asset classification and provisioning norms for NBFCs in line
with the banks.
Exhibit 1: Proposed changes for NBFCs by the working group panel
Regulations Applicable Proposed
Capital adequacy requirement 15% 12% tier 1 itself
NPA classification 180 days 90 days
Asset classification Provisioning requirements
Standard asset .25% 0.25%-2%
Substandard asset 10% 15%
Doubtful 20-100% 25-100%
Loss Asset 100% 100%
Source: Company, Angel Research
Some of the other major recommendations that were made by the working group:
1. Merger of Loan and Investment companies into a single category.
2. Risk weights for NBFCs may be raised to 150% for capital market exposure and
125% for Capital real estate exposure.
3. Liquidity ratio to be introduced for all registered NBFCs, such that cash bank
balances and holdings of government securities cover the gaps between
cumulative outflows and inflows for the first 30 days.
4. Similar regulations as banks for NBFCs while lending to stock brokers and
merchant bankers and while engaging in margin financing.
5. Higher legal powers in hands of RBI relating to management, while regulating
NBFCs, similar to those available under the Banking Regulation Act.
6. Additional disclosures (such as PCR ratio, liquidity ratio, off-balance sheet
exposures) to be made mandatory for NBFCs.
Exhibit 2: Major Financial entities and their current capital positions
NBFC Capital Adequacy Ratio (%) Tier I Capital (%)
HDFC# 14.0 12.2
Power Fin. Corp. 18.9 Not Available
Rural Elec. Corp. 18.4 Not Available
LIC Housing Fin. 14.9 8.6
IDFC 24.5 21.9
Shriram Trans. 24.9 24.9
IFCI 18.0 18.0
Dewan Housing# 19.4 13.9
M&M Financial 20.3 17.0
Chola Investments 16.7 10.8
Source: Company, Angel Research, note#; HFCs not covered under these proposals, though similar
norms getting introduced for them by NHB going forward cannot be ruled out
The proposed recommendations if implemented will increase the NPA book and the
provisioning requirements for NBFCs. Also, although most larger NBFCs currently
have Tier 1 CRAR more than 12%, however if 12% becomes the minimum norm, it
can be expected that most NBFCs would look to maintain atleast 13-15% to be
comfortable on the capital adequacy front, hence reducing the outlook for their
sustainable leverage and ROE potential.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI releases report of the working group on NBFC sector
The RBI has proposed new regulations for non-banking finance firms (NBFCs), mostly
centered on minimising the regulatory arbitrage opportunities available to NBFCs as
compared to banks. One of the major changes proposed by the RBI is brining the capital
adequacy requirements and asset classification and provisioning norms for NBFCs in line
with the banks.
Exhibit 1: Proposed changes for NBFCs by the working group panel
Regulations Applicable Proposed
Capital adequacy requirement 15% 12% tier 1 itself
NPA classification 180 days 90 days
Asset classification Provisioning requirements
Standard asset .25% 0.25%-2%
Substandard asset 10% 15%
Doubtful 20-100% 25-100%
Loss Asset 100% 100%
Source: Company, Angel Research
Some of the other major recommendations that were made by the working group:
1. Merger of Loan and Investment companies into a single category.
2. Risk weights for NBFCs may be raised to 150% for capital market exposure and
125% for Capital real estate exposure.
3. Liquidity ratio to be introduced for all registered NBFCs, such that cash bank
balances and holdings of government securities cover the gaps between
cumulative outflows and inflows for the first 30 days.
4. Similar regulations as banks for NBFCs while lending to stock brokers and
merchant bankers and while engaging in margin financing.
5. Higher legal powers in hands of RBI relating to management, while regulating
NBFCs, similar to those available under the Banking Regulation Act.
6. Additional disclosures (such as PCR ratio, liquidity ratio, off-balance sheet
exposures) to be made mandatory for NBFCs.
Exhibit 2: Major Financial entities and their current capital positions
NBFC Capital Adequacy Ratio (%) Tier I Capital (%)
HDFC# 14.0 12.2
Power Fin. Corp. 18.9 Not Available
Rural Elec. Corp. 18.4 Not Available
LIC Housing Fin. 14.9 8.6
IDFC 24.5 21.9
Shriram Trans. 24.9 24.9
IFCI 18.0 18.0
Dewan Housing# 19.4 13.9
M&M Financial 20.3 17.0
Chola Investments 16.7 10.8
Source: Company, Angel Research, note#; HFCs not covered under these proposals, though similar
norms getting introduced for them by NHB going forward cannot be ruled out
The proposed recommendations if implemented will increase the NPA book and the
provisioning requirements for NBFCs. Also, although most larger NBFCs currently
have Tier 1 CRAR more than 12%, however if 12% becomes the minimum norm, it
can be expected that most NBFCs would look to maintain atleast 13-15% to be
comfortable on the capital adequacy front, hence reducing the outlook for their
sustainable leverage and ROE potential.
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