Norms for Credit and Investment Concentration and Credit Risk Transfer

  1. The Reserve Bank of India (RBI) has recently made amendments to the Credit and Investment concentration norms on 15 January, 2024, with a specific focus on Base and Middle Layer Non-Banking Financial Companies (NBFCs). The guidelines introduce significant changes to promote uniformity and consistency among NBFCs when calculating concentration norms.

The guidelines shall apply to all Non-Banking Financial Companies including Housing Finance Companies

I. Regulations for Middle Layer NBFCs (NBFC-MLs):

  1. RBI has recently authorised NBFC MLs to offset their aggregate exposure by utilising additional Credit Risk Transfer (CRT) instruments, in addition to Credit Default Swaps (‘CDS’).
  2. Collateral in the form of cash margin, caution money, or security deposit is held on behalf of the borrower to secure the advances, with the right to set off if necessary.
  3. Apart from the credit/investment concentration norms outlined in the SBR Master Directions and HFC Master Directions, the following will be exempted from these norms:
  • Exposures to the Central and State Government that have no risk weight; and
  • Exposures where both the principal and interest are fully guaranteed by the Government of India (All individuals in state government must be included).

II. Regulations for Base Layer NBFCs (NBFC-BLs):

It is now mandatory for NBFC BLs to establish an internal board-approved policy for credit/investment concentration limits. This policy applies to both single borrower/party and single group of borrowers/parties. The computation of these limits must adhere to the requirements applicable to NBFC MLs.

Additional instruments will now be available for NBFC MLs to offset their aggregate exposure.

They can also exclude the mentioned exposures from the credit/investment concentration norms. Note that to qualify as a credit risk transfer instrument, guarantees must meet specific criteria. These criteria include being direct, explicit, irrevocable, and unconditional. (also applicable to NBFC ULs)  

NBFC BLs will need to establish a board-approved internal policy for credit/investment concentration limits.