The prudential guidelines for Non-Banking Financial Companies (NBFCs) issued by the Reserve Bank of India (RBI) form the backbone of financial discipline and risk management in the sector. These norms ensure NBFCs maintain sound practices in asset classification, provisioning, exposure management, liquidity, and governance, thereby safeguarding both creditors and the wider financial system.
Under the Scale-Based Regulatory (SBR) Framework, prudential norms are applied proportionally—lighter for smaller NBFCs and stricter for systemically important ones.
Core Prudential Norms
Codified under RBI’s Master Directions, the prudential guidelines cover the following areas:
🔹 Asset Classification & Provisioning
* NBFCs must classify assets as standard, sub-standard, doubtful, or loss and make provisions accordingly.
* Standard Assets: Minimum provision of 0.25%.
* Non-Performing Assets (NPAs): Higher provisioning norms apply.
* Income Recognition: For NPAs, income can only be recognized on actual realization, not on accrual basis.
🔹 Exposure Limits
* Upper-Layer NBFCs:
* Single borrower limit → 20% of capital base (extendable to 25% with board approval).
* Group exposure limit → 25% of capital base (extendable to 35% for infrastructure lending).
* Other Layers: Lower and middle layer NBFCs have more flexible, tailored exposure norms.
🔹 Liquidity & Leverage
* Liquidity Coverage Ratio (LCR):
* Mandatory 100% LCR for all deposit-taking NBFCs and non-deposit-taking NBFCs with assets > ₹5,000 crore.
* Leverage Ratio: Restrictions apply across NBFCs to prevent over-borrowing and manage risk.
🔹 Governance & Disclosures
* Stronger governance requirements for middle and upper-layer NBFCs, including enhanced board oversight.
* Annual audited financials must disclose:
* Asset quality
* Provisioning details
* Liquidity position
* Exposure limits
* Compliance status
🔹 Special Provisions
* Restrictions on:
* Lending against own shares
* Demand/call loans
* Mandatory segregated lending policies for different loan types.
* NBFC groups must consolidate asset size for compliance and are barred from raising public deposits unless specifically authorized.
Conclusion
RBI’s prudential norms ensure NBFCs operate with financial soundness, transparency, and discipline. While smaller NBFCs benefit from lighter requirements, **systemically important NBFCs face norms nearly as rigorous as banks**, strengthening the stability of India’s financial system.
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Disclaimer:
The information provided herein is exclusively for educational purposes based on publicly available sources and subject to change. The author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/real estate decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
