RBI Provisioning Norms for NBFCs: Important Highlights

The Reserve Bank of India (RBI) has come out with a set of norms for provisioning for standard assets by large Non-Banking Financial Companies (NBFCs). The norms have been set keeping in mind the increasing role played by NBFCs in the financial system of the nation.

What are the provisions announced?

  • The RBI specified the provisioning that NBFCs, classified as the upper layer, must maintain for some categories of their standard assets. These NBFCs must make a provision of 2 percent on standard assets for all housing loans that are disbursed at teaser rates.
  • The new norms will be coming into effect from 1st
  • At present, standard asset provisions are made at a rate of 0.4 percent by systemically important NBFCs.
  • The RBI introduced provisioning for standard assets after 2011 and by March 2015, the provisioning needed to be 0.25% of outstanding assets.
  • In the initial years, teaser loans attract lower interest rates but later the rates are reset higher. The provisioning rate will decline to 0.4 percent after a year from the rate reset date.
  • For projects other than residential ones under commercial real estate loans, provisions on standard assets have been set by the RBI at 1 percent of the total outstanding amount. Under his category, loans will be provided for retail space, office buildings, industrial or warehouse space, multi-purpose commercial premises, hotels, etc. Loans for which recovery in the case of default depends on cash flows arising from such properties have also been included under this category.
  • For commercial real estate loans, the rate of provision for residential housing stands at 0.75 percent of the total outstanding amount. For projects having residential and commercial parts, the commercial area must be less than 10 percent of the total floor space index.
  • For loans to small and micro enterprises and individual housing loans, NBFCs will have to make a provision of 0.25 percent for standard assets. For all other loans, the rate of provision has been set at 0.4 percent of the outstanding amount.

Why have these provisions been announced?

The rules have been announced by the RBI as part of the framework for the regulation of NBFCs based on their scales. In April, the RBI had tightened capital requirements norms and had introduced other rules on the large exposure framework. In October 2021, the RBI issued a framework for the regulation of NBFCs on the basis of their scale. The NBFCs regulatory structure comprises four layers based on their activity, size, and perceived riskiness.

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