What changed
RBI introduced a dedicated Large Exposures Framework (LEF) for NBFC-ULs, replacing earlier general exposure norms. The framework defines 'group of connected counterparties' based on control or economic interdependence, with specific criteria like 50% voting rights or revenue dependence. It also specifies Tier I capital as the eligible capital base and requires external auditor certification for capital augmentation.
What it means for you
NBFC-ULs must now strictly monitor and report large exposures, limiting concentration risk. The connected counterparty definition expands the scope of aggregation, potentially increasing capital requirements for groups with intertwined businesses. Banks lending to NBFC-ULs should reassess their own exposure concentration, as these norms may affect NBFC-ULs' borrowing capacity and risk profiles.
What you must do
- Review and update internal exposure monitoring systems to align with the new LEF definitions and thresholds.
- Identify and document all connected counterparties using the control and economic interdependence criteria.
- Ensure Tier I capital calculations include accrued profits only after obtaining external auditor certification.
- Prepare for enhanced reporting to RBI on large exposures as per the annexed guidelines.
Who it affects
NBFCs classified as Upper Layer (NBFC-UL), Banks and lenders with significant exposure to NBFC-ULs, RBI supervision teams monitoring NBFC compliance
What is the eligible capital base for calculating large exposure limits?
The eligible capital base is Tier I capital as defined in the Master Direction for systemically important NBFCs, including accrued profits after adjustments and external auditor certification.
How does RBI define a 'group of connected counterparties'?
Two or more persons are connected if one controls the other (e.g., >50% voting rights) or they are economically interdependent, such as when 50%+ of revenue comes from transactions with each other or they share a common funding source.
When did this framework become effective?
The circular was issued on April 19, 2022, and the detailed guidelines were annexed for immediate implementation by NBFC-ULs.