NBFC standards proposed by RBI ignore major credit concerns: Moody’s

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Stricter standards proposed by the Reserve Bank of India (RBI) for non-bank financial corporations (NBFC) support strong balance sheets but fail to address funding and liquidity issues, the industry’s main credit weaknesses, report says from Moody’s Investors Service. .

“If implemented, regulations will allow businesses to become more resilient to credit shocks. However, the proposals do not address the financing and liquidity of NBFCs, ”the report said.

He noted that the proposed new regulations would result in widely harmonized rules between banks and NBFCs on capital and leverage, which would reduce regulatory arbitrage opportunities for NBFCs against banks in their lending decisions. .

However, no changes are proposed to the current lighter liquidity rules of NBFCs. Banks are subject to strict regulations on maintaining a minimum cash reserve ratio and statutory liquidity reserve which are not imposed on NBFCs.

“This means that the proposal does not address the main weakness of NBFCs; the sector will continue to pose risks to the quality of banks’ assets as banks are the biggest lenders of NBFCs,” he said.

The RBI has proposed classifying NBFCs into four categories based on their size and systemic importance. If implemented, the 25 to 30 largest NBFCs will be classified as NBFC-Upper Layer (NBFC-UL) and will have to maintain a minimum Common Equity Tier 1 (CET1) ratio of 9%, compared to 8% for banks.

They will also be subject to similar rules that already apply to banks, such as maximum leverage ratio, standard asset provisioning, credit concentration and exposure limits, corporate governance and structure. of the group.

NBFCs will need board approved policies to focus on riskier industries such as real estate, which has been a source of asset quality issues for NBFCs.

“We expect the top rated NBFCs to be classified as NBFC-UL,” Moody’s report said.

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