Page 32 - BANKING FINANCE OCTOBER 2021

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regulatory capital and it is advised that Common Equity Tier
may be stipulated at 9 per cent within the Tier I capital.
With an intention of tweaking regulatory charter for NBFC-
UL to larger sensitivity, the discussion paper recommended
that NBFCs in this layer should be imposed differential normal
asset provisioning at par with the banks and intends to
extend suitable version of the Large Exposure Framework
as pertinent to banks. As a result, the top NBFCs will move
to distinguished standard provisioning norms as against the
fixed 0.4% on par with banks. Consequently NBFCs with
greater exposure to commercial real estate, may have to
carry upper provisioning than before.

Considering the ability of NBFCs lying in this layer to produce structure for such finance companies or shadow banks in
hostile systematic risks the Central bank is of the opinion that over twenty years, if executed effectively.
the governing outfits can be adjusted at par with the private
banks and NBFCs should be subject to the obligatory listing Easier and liberal regulations have given NBFCs the elasticity
condition and should follow the consequential Disclosures to meet a series of financial requirements such as housing
Requirements and Listing Obligations. loans, micro finance and huge infrastructure plans and as a
result the sector has witnessed tremendous growth.
This layer will be formed based on a variety of factors such However, it has also manifested into a systemic risk and the
as size, inter-connectedness, intricacy and managerial risk was visible when one of the major infrastructure
inputs which includes type of liabilities, group structure and investment-centered NBFC players, IL&FS, tattered in 2018,
segment penetration. 35%, 25%, 10% and 30% weightage with its payment evasions catalyzing a disaster for the whole
will be given to these parameters respectively. As per the sector. Due to this NBFCs could not nurture funds easily and
RBI, top ten NBFCs such as Bajaj Finance, LIC Housing confronted liquidity burdens that worsened solvency
Finance etc will spontaneously fall in this class. NBFCs in this concerns in some illustrations.
layer will also have to obey with the leverage requirement.
The leverage ratio is calculated as Tier 1 capital divided by Therefore, the RBI's planned supervisory reaction to NBFC
the bank's exposures and therefore an increase in exposure sector letdowns is most wanted step which targets to strike
would lead to a reduction in LR. The RBI proposes an a balance among the need to be nimble and mollify systemic
appropriate limit to be laid down for this layer. risks, with a four-tiered regulatory outline. Due to anguishes
of banking sector over the past two years, an all-inclusive
Top Layer (TL): At present this layer will remain vacant.
reboot of the supervision system for NBFCs is essential to
Careful administrative decision must push few NBFCs to this recollect the confidence and preserve financial solidity. It is
layer from upper layer of the systemically significant NBFCs
wished that the blueprint for the supervision of NBFCs which
for superior control or supervision. Thus, if there is a
can advance for activities banks habitually do not aid, is
systemic risk observed from particular NBFCs in the UL, the
sanctified soon. This would guarantee the fledgling economic
Central Bank can force few NBFCs to enter the TL.
retrieval is not hindered by funding restraints.
Nip in the bud Even though the proposal is positive for the sector better

The Central Bank's framework to constrict inspection of implementation will ensure the efficient outcome. So the
large NBFCs is crucial for fiscal steadiness. Shift from a RBI needs to improve its supervision competences and needs
common line of light touch control to one that screens larger to nip in the bud the extreme interconnectedness between
players almost as closely as it does banks is a welcome move. NBFCs and banks which is the root cause of a potentially
This could be the biggest refurbishment of the governing much more hazardous virus. T

32 | 2021 | OCTOBER | BANKING FINANCE