RBI specifies provisioning norms for NBFC-UL

The Reserve Bank of India on Monday specified the provisioning that non-banking financial companies (NBFCs), classified as the upper layer, must maintain for some categories of standard assets. According to the regulations, these NBFCs will need to make provision of 2% on standard assets for housing loans disbursed at teaser rates. The new norms on standard asset provisioning will come into effect from October 1. Currently, systemically important NBFCs make standard asset provision at a flat rate of 0.4%.

The RBI introduced provisioning for standard assets after 2011 and by March 2015, the provisioning needed to be 0.25% of outstanding assets.

Teaser loans attract lower interest rates in initial years after which rates are reset higher. The rate of provisioning will decline to 0.4% after a year from the date on which the rates are reset.

For commercial real estate loans for projects other than residential ones, provisions on standard assets have been set at 1% of the outstanding amount. Loans disbursed for office buildings, retail space, multi-purpose commercial premises, industrial or warehouse space, hotels or land acquisition will fall under this category.

Loans for which the recovery in the case of a default will depend on cash flows arising from such properties will also be included under this category.

The rate of provision for commercial real estate loans for residential housing stands at 0.75% of the outstanding amount. For projects which have commercial and residential parts, the commercial area must be less than 10% of the total floor space index (FSI).

For all individual housing loans and loans to small and micro enterprises (SMEs), such NBFCs will have to make provision of 0.25% for standard assets. For all other loans, the rate of provision is 0.4% of the outstanding amount.

The RBI has issued the rules on standard asset provisioning as part of the framework for scale-based regulation for NBFCs. In April, the central bank had tightened capital requirements norms and introduced rules on the large exposure framework.

In October 2021, the RBI introduced the scale-based regulatory structure for NBFCs. The structure consists of four layers based on size, activity and perceived riskiness – base layer, middle layer, upper layer and top layer. The intent behind these regulations is to bring more stability to the shadow banking sector.

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