The Reserve Bank of India (RBI) has revamped its regulatory framework for classifying Non-Banking Financial Companies (NBFCs) into the upper layer, introducing a simplified Rs 1 lakh crore asset threshold. This regulatory overhaul, which notably brings government-owned infrastructure finance companies (NBFC-IFCs) into the upper layer scope, has drawn optimistic commentary from global brokerages Morgan Stanley and Jefferies. According to analysts, simplifying the classification to a flat Rs 1 lakh crore asset threshold will lead to a significant NBFC reshuffle, especially among state-run companies.
Overall, brokerages view the RBI's finalized guidelines as a balanced move, strengthening systemic oversight for Rs 1 lakh crore-plus entities without choking off the vital credit pipelines needed for India's infrastructure and power sectors. Large infrastructure and power financiers currently classified in the middle layer are now slated to move to the upper layer.
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NBFC Reshuffle
Jefferies expects major public sector undertaking (PSU) NBFCs, such as REC, Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC), and HUDCO-to be added to this heightened regulatory tier. Conversely, entities like PNB Housing Finance and a few others are expected to exit the upper layer classification under the revised criteria.
The RBI has also formalized new group exposure limits, which Morgan Stanley notes will have a highly "manageable" impact on key players like PFC and REC. For the upper layer NBFC-IFCs, the group exposure limit has been set at 45% of their eligible capital base. This limit is a welcome relaxation for the sector entities from the stricter 35% cap that was initially proposed in the draft norms, though it remains slightly tighter than the previous 50% allowance, according to analysts.
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To prevent market disruption, the RBI has provided a clause. Morgan Stanley pointed out that any existing breaches of the new limits as of the guideline's implementation date will be permitted to run off naturally until maturity. The central bank has also built flexibility into the framework. PSU NBFCs will still be able to take on exposures beyond the prescribed 45% limit, provided that these excess exposures are fully covered by credit risk transfer instruments.
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