RBI asks NBFCs to make additional disclosures under scale-based regulation regime

The pandemic conditions necessitated the introduction of an ultra-loose monetary policy condition, says Soumyajit Niyogi.

The Reserve Bank of India has asked non-banking finance companies (NBFCs) to make additional disclosure in accordance with its framework for scale-based regulation of shadow lenders.

“These disclosures are in addition to and not in substitution of the disclosure requirements specified under other laws, regulations, or accounting and financial reporting standards,” the RBI said in a statement.

“More comprehensive disclosures than the minimum required are encouraged, especially if such disclosures significantly aid in the understanding of the financial position and performance.”

The disclosures pertain to regulatory requirements, exposure to sectors like real estate, capital market, intragroup exposures and exposures related to unhedged foreign currency among others.

These guidelines are applicable to all NBFCs and shall be effective for annual financial statements for year ending March 31, 2023, and onwards, the banking regulator said.

In October last year, RBI introduced a scale-based regulatory framework for NBFCs that is effective October 1, 2022. This framework enlists different facets of regulation of NBFCs pertaining to capital requirements, governance standards, and prudential regulation, among others. Under this regime, NBFCs are divided into four layers on the basis of their size, activity, and perceived risk.

The RBI is aiming to tighten its regulatory noose on NBFCs, especially after the fallout of IL&FS and DHFL posed systemic risks.

Under the new disclosures, the RBI has asked NBFCs to disclose direct exposure to residential mortgages, commercial real estate along with investments in Mortgage-Backed Securities (MBS) and other securitized exposures.

It has also asked shadow lenders to disclose their direct investment in equity shares, convertible bonds, convertible debentures, and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt.

Bridge loans to companies against expected equity flows or issues and underwriting commitments taken up by such lenders towards bonds are also to be disclosed along with their total exposure to the capital market, the RBI said.

NBFCs will also have to disclose their sectoral exposure to agriculture and allied activities, personal loans, and industry, among others, the central bank said. It has also asked shadow lenders to disclose intra-group and related party disclosures and their exposure to unhedged foreign currency.

A summary of information on complaints received by the NBFCs from customers and from the offices of the ombudsman will also have to be disclosed, the RBI said.

To adhere to corporate governance standards, NBFCs will have to make full disclosure in accordance with the requirement of the capital market regulator in terms of the composition of the board, and general body meetings, among others.

NBFCs are to disclose all instances of breach of the covenant of loan availed or debt securities issued along with divergence in asset classification and provisioning, according to the central bank.​