The Reserve Bank of India (RBI) has recently introduced updated guidelines for Infrastructure Debt Fund-Non-Banking Financial Companies (IDF-NBFCs), through a circular, RBI/2023-24/54, dated August 18 2023. This circular provides an overview of the review of the regulatory framework for Infrastructure Debt Fund-Non-Banking Finance Companies (IDF-NBFCs) and introduces its revised guidelines. The review was undertaken in consultation with the Government of India, in order to enable IDF-NBFCs to play a greater role in the financing of the infrastructure sector and to harmonize the regulations governing the financing of the infrastructure sector by NBFCs.
An Infrastructure Debt Fund (IDF) is established in one of two structures: either as a trust or as a company. When structured as a trust, it is recognized as an IDF-Mutual Fund (IDF-MF) and falls under the oversight of the Securities and Exchange Board of India (SEBI). On the other hand, if organized as a company, it is designated as an IDF-Non-Banking Financial Company (IDF-NBFC) and is subject to regulation by the Reserve Bank of India (RBI). Over the years, Non-Banking Financial Companies (NBFCs) have played an increasingly important role in financial intermediation while enjoying greater operational flexibility than banks, allowing them to undertake a wider range of activities, enter new geographies and sectors, and grow their operations.
The circular has been aimed at empowering IDF-NBFC’S to act as a key player in financing the infrastructure sector and it highlights the following main aspects of the regulatory framework:
The definition of IDF-NBFC’s has been revised by the circular to identify them as non-deposit taking NBFC that is authorized to -
i) refinance infrastructure projects post commencement operations date (COD) that have completed at least one year of satisfactory commercial operations and,
ii) finance toll operates transfer (TOT) projects as the direct lender.
With the advent of the circular, Infrastructure Debt Fund-NBFCs (IDF-NBFCs) are now mandated to have a net owned fund (NOF) of at least Rs 300 crore. Furthermore, they are required to have a capital-to-risk weighted assets ratio (CRAR) of a minimum of 15 per cent (with a minimum Tier 1 capital of 10 per cent).
Earlier, IDF-NBFCs had the authorization to secure funds using rupee or dollar-based bonds with a maturity of at least five years, limited to 10% of their overall outstanding borrowings. With the updated regulations, IDF-NBFCs are now permitted to generate funds through external commercial borrowings in the form of loans, provided the loans have a minimum tenure of five years. It's pertinent to note that these loans cannot originate from the overseas branches of Indian banks. In addition to issuing bonds with a minimum maturity of five years, IDF-NBFCs can also raise funds by issuing shorter-term bonds and commercial papers (CPs), up to a maximum of 10% of their total outstanding borrowings. This has been notified with the objective to facilitate effective control of Asset-Liability management. They can also raise funds through external commercial borrowings (ECBs) with a minimum maturity of five years, subject to certain conditions.
Through the revised circular, it has been notified that the exposure limits for IDF-NBFCs are set at 30% of their Tier 1 capital for a single borrower or party, and 50% of their Tier 1 capital for a single group of borrowers or parties. Tier 1 capital refers to the core capital of an IDF-NBFC, consisting of equity and retained earnings. The notification also states that, for computing the capital adequacy ratio (CAR) of an IDF-NBFC, its assets will be risk-weighted according to the risk weights applicable to NBFC-Investment and Credit Companies (NBFC-ICCs). The capital adequacy ratio is also known as the capital-to-risk weighted assets ratio, which is a measure of an IDF-NBFC's financial strength.
The updated circular has effectively brought in certain changes in the sponsorship requirements of IDF-NBFC’s. Under the previous guidelines, an IDF-NBFC was required to have a sponsor, which was typically a bank or an NBFC-IFC. However, the revised guidelines have withdrawn this requirement, and instead, the shareholders of IDF-NBFCs will be subject to the same scrutiny as other NBFCs, including NBFC-IFCs. This change by the RBI has shifted the onus from sponsor-based scrutiny to ensuring uniform regulatory oversight across the NBFC Sector.
In comparison with the earlier guidelines, it was mandatory for IDF-NBFCs to establish a tripartite agreement with the concessionaire and the project authority when investing in Public Private Partnership (PPP) infrastructure projects that had a project authority. This obligation is now discretionary. Moreover, all NBFCs can potentially act as sponsors for Infrastructure Debt Fund-Mutual Funds (IDF-MFs), pending approval from the RBI and adherence to specific requirements. This is in addition to the conditions set by the Securities and Exchange Board of India (SEBI). In addition to the prescribed norms, the RBI notified that all other regulatory norms, including income recognition, asset classification and provisioning norms as applicable to NBFC investment and credit companies will be applicable to IDF-NBFCs.
The aforementioned RBI's circular demonstrates its resoluteness in creating a favourable environment for infrastructure financing through IDF-NBFCs. The revised regulatory framework aims to simplify procedures, improve transparency by ensuring uniform regulatory oversight, and boost IDF-NBFCs' involvement in driving infrastructure development. This update also demonstrates the RBI's proactive approach to ensuring a solid regulatory environment while aligning with the country's infrastructure development goals.