Guidelines on Revised Regulatory Framework for IDF-NBFCS

To enable IDF-NBFCs to play a larger role in the financing of the infrastructure sector and to harmonize the regulations regulating NBFCs’ financing of the infrastructure sector, a review of the applicable guidelines for IDF-NBFCs has been conducted.

Infrastructure Development Funds (IDFs) are of two kinds:

A trust-based Infrastructure Debt Fund (IDF-MF) which is subject to regulation by the Securities and Exchange Board of India (SEBI); and

Company-based IDF (IDF-NBFC) which is regulated by the Reserve Bank of India.

An IDF-NBFC is a non-deposit-taking NBFC that provides refinancing for infrastructure projects that have reached the post-commencement operations date (COD) and have successfully completed one year of commercial operations. Additionally, it can also provide financing for toll operate transfer (TOT) projects as the primary lender.

In a move to bolster the financing of the infrastructure sector, a comprehensive review of the guidelines governing IDF-NBFCs has been carried out. The aim is to empower IDF-NBFCs to assume a more significant role in funding infrastructure projects and to streamline the regulations governing their involvement in this crucial sector.

Pursuant to the review of the above guidelines, a revised regulatory framework for IDF-NBFCs has been issued by RBI vide circular bearing reference number RBI/2023-24/54 DOR.SIG.FIN.REC.31/03.10.001/2023-24 dated 18 August, 2023.

These revised guidelines will come into effect from January 1, 2024, and will apply to all Infrastructure Debt Fund-NBFCs.

According to the new guidelines, IDF-NBFCs shall have a minimum Net Owned Fund (NOF) of Rs 300 crore, and a minimum capital-to-risk weighted assets ratio (CRAR) of 15% (with Tier 1 capital of 10%).

The IDF-NBFC would issue rupee or dollar bonds with a minimum duration of five years to raise capital. IDF-NBFCs can raise up to 10% of their outstanding borrowings from the domestic market through shorter-duration bonds and commercial papers (CPs) to improve asset-liability management.

IDF-NBFCs can raise capital through external commercial borrowings (ECBs) as well as bonds. ECB loans cannot come from foreign branches of Indian banks and must have a five-year duration.

Regarding ECBs, IDF-NBFCs will also be required to adhere to the RBI Foreign Exchange Department’s guidelines.

The exposure limits for IDF-NBFCs are 30% of their Tier 1 capital for a single borrower or party and 50% for a single group of borrowers or parties.

IDF-NBFC assets will be risk-weighted according to NBFC-Investment and Credit Companies (NBFC-ICCs) for CRAR calculation.

Previous guidelines required IDF-NBFCs to get sponsorship from a bank or NBFC-Infrastructure Finance Company (NBFC-IFC). A sponsor is no longer required for an IDF-NBFC, and its shareholders would be scrutinised like other NBFCs, including NBFC-IFCs.

Previously, it was mandatory for IDF-NBFCs to engage in a tripartite agreement with the concessionaire and the project authority in order to make investments in Public Private Partnership (PPP) infrastructure projects that have a project authority. The tripartite agreement requirement has been revised to be discretionary.

All regulatory norms, including income recognition, asset classification, and provisioning, applicable to NBFC-ICCs will also apply to IDF-NBFCs.

All Non-Banking Financial Companies (NBFCs) are eligible to act as sponsors for Infrastructure Debt Fund-Mutual Funds (IDF-MFs) in accordance with the definition of sponsorship provided by SEBI Regulations for Mutual Funds. However, prior approval from the Reserve Bank of India (RBI) is required, subject to the following conditions based on the audited financial statements, which are in addition to the requirements specified by SEBI:

  1. The Non-Banking Financial Company (NBFC) is required to maintain a minimum Net Owned Funds (NOF) of ₹300 crores and a Capital to Risk-Weighted Assets Ratio (CRAR) of 15 per cent.
  2. The net non-performing assets (NPAs) of the company must not exceed 3 per cent of the net advances.
  3. The requirement is that it must have been in existence for a minimum of 5 years.
  4. The company has consistently generated profits over the past three years and has demonstrated satisfactory performance.
  5. The Capital to Risk-Weighted Assets Ratio (CRAR) of the Non-Banking Financial Company (NBFC) after making an investment in the Infrastructure Debt Fund-Mutual Fund (IDF-MF) shall not be lower than the minimum regulatory requirement set for the NBFC.
  6. The Non-Banking Financial Company (NBFC) must maintain Net Owned Funds (NOF) levels, even after investing in the planned Infrastructure Debt Fund-Mutual Fund (IDF-MF).