RBI Tightened Prudential Norms for Nonbanking Finance Companies

The Reserve Bank of India on 17 January 2011 tightened the prudential norms for nonbanking financial companies. The prudential norms were tightened by RBI with an objective to protect them from any impact of possible economic downturn, a development that can push up their lending rates. As per the new RBI norms, both deposit and non-deposit taking NBFCs will have to set aside 0.25% of performing loans to meet any financial exigencies. RBI’s decision in this respect is expected to push up lending rates by NBFCs as they will be required to keep additional funds as buffer even for those loans on which interest has been paid regularly by the borrowers. The interest rate in this case can be pushed up to 25 basic points.

The NBFCs earlier were required to set aside funds for doubtful and bad assets and are to be loose loans on which the interest has not been paid regularly by borrowers or defaults had been reported. According to the RBI notification NBFCs ought to make a general provision at 0.25% of the outstanding standard assets. Standard assets comprise those loans on which interest has been regularly by the borrowers and the possibility of default is remote. The notification also specified that the provisions on standard assets should not be reckoned for arriving at net NPAs. RBI wants the provision towards standard assets be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' in the balance sheet.