Exploring RBI’s Comprehensive Regulatory Policy On Bank Financing Of NBFCs

Introduction:

In a bid to ensure the stability and integrity of India’s financial sector, the Reserve Bank of India (RBI), exercising the powers conferred by the Banking Regulation Act, 1949, has promulgated a comprehensive Master Circular dated 03.04.2023, which encapsulates the extant guidelines on bank finance to Non-Banking Financial Companies (NBFCs). This directive, classified as a statutory guideline under Section 35A of the Banking Regulation Act, 1949, supersedes previous directives, most notably the Master Circular DBR.BP.BC.No.5/21.04.172/2015-16 dated 01.07.2015. Applicable to all Scheduled Commercial Banks (excluding Regional Rural Banks), this policy serves as a foundational framework for bank-NBFC engagements, aiming to promote prudence, stability, and resilience within the financial system.

Analysis:

The Reserve Bank of India (RBI) has promulgated an extensive regulatory policy governing the financing of Non-Banking Financial Companies (NBFCs) by banks. This circular supersedes all previous instructions on the subject up to 31.03.2023.

Enhanced Credit Facilities to Registered NBFCs

The Circular heralds the removal of the erstwhile ceiling on bank credit to NBFCs’ Net Owned Fund (NOF), thereby liberalizing the credit framework. This applies to all RBI-registered NBFCs primarily engaged in asset financing, loans and investment activities. Scheduled Commercial Banks are now empowered to extend need-based working capital and term loans to these NBFCs, albeit within the confines of the prescribed guidelines.

Restrictions on Bank Credit

The Circular delineates specific activities that are ineligible for bank credit. These include:

• Bills Discounting: Banks are prohibited from discounting or rediscounting bills for NBFCs, with the exception of those arising from the sale of commercial vehicles, two-wheelers, and three-wheelers under certain conditions.
• Investment Finance: Banks are barred from financing any investments made by NBFCs in shares, debentures, etc., except for stock broking companies, which may receive need-based credit against their stock-in-trade.
• Unsecured Loans: The Circular forbids banks from extending unsecured loans or Inter-Corporate Deposits (ICDs) to any company through NBFCs.
• Group Company Financing: NBFCs are restricted from receiving bank finance for loans and advances to their subsidiaries or group companies/entities.
• IPO Financing: Banks are not to finance NBFCs for lending to individuals for Initial Public Offerings (IPOs) or for purchasing shares from the secondary market.

Leased and Sub-Leased Assets

RBI directed that as banks can extend financial assistance to equipment leasing companies, they should not enter into lease agreements departmentally with such companies as well as other Non-Banking Financial Companies engaged in equipment leasing.

Support for Factoring Companies

The Circular permits banks to provide financial assistance to Factoring Companies, including ‘NBFC-Factors’ and ‘NBFC-ICCs’ registered under the Factoring Regulation Act, 2011, subject to compliance with the stipulated criteria.

Prudential Ceilings on Bank Exposures

The RBI has imposed prudential ceilings on banks’ exposure to NBFCs:

• Single NBFC Exposure: Limited to 20% of the bank’s Tier I capital.
• Group Exposure: Capped at 25% of the bank’s Tier I capital for a group of connected NBFCs or connected counterparties.
• Gold Loan Companies: A bank’s exposure to a single NBFC predominantly engaged in gold jewellery lending should not exceed 7.5% of the bank’s capital funds. This can be extended to 12.5% if the additional exposure is directed towards the infrastructure sector.

Investment in Securities Issued by NBFCs

Banks are cautioned against investing in Zero Coupon Bonds issued by NBFCs unless a sinking fund is established. Investments in Non-Convertible Debentures (NCDs) with a maturity of up to one year are permitted, provided the issuer discloses the purpose of the issuance.

Conclusion:

In conclusion, the RBI’s regulatory policy on bank financing of NBFCs embodies a prudent approach towards maintaining financial integrity and stability. By delineating clear guidelines and prohibitions, the policy seeks to foster a conducive environment for sustainable financial intermediation. The RBI’s regulatory policy stands as a testament to the regulator’s commitment to fostering a robust and resilient financial sector. Moving forward, stakeholders must remain vigilant and proactive in their compliance efforts, recognizing the pivotal role of regulatory adherence in safeguarding financial stability. By upholding the tenets of prudence and accountability, banks and NBFCs can collectively contribute towards the realization of a vibrant and resilient financial ecosystem that fosters inclusive growth and economic prosperity for all stakeholders.