RBI has, on 11 February 2010, amended the Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 [NBFC Directions] to introduce a 4th category of Non Banking Financial Company [NBFC] viz. “Infrastructure Finance Company” [IFC]. This is in addition to the existing 3 categories of NBFCs viz. Asset Finance Company (AFC), Loan Company (LC) and Investment Company (IC).

Salient features of the amendments to the NBFC Directions are as under:

Meaning of IFC:

IFC has been defined to mean a NBFC which deploys at least 75% of its total assets in “infrastructure loans”.

The definition of “infrastructure loan” has been amended to include credit facility extended to a project of laying down and/or maintenance of gas, crude oil and petroleum pipelines. However, credit facility extended by NBFC to a project of construction of educational institutions and hospitals has been excluded from the definition of the term an “infrastructure loan”. The amended definition of “infrastructure loan” under the NBFC Direction is as under:

Infrastructure loan means a credit facility extended by NBFC to a borrower, by way of term loan, project loan subscription to bonds / debentures / preference shares / equity shares in a project company acquired as a part of the project finance package such that such subscription amount to be “in the nature of advance” or any other form of long term funded facility provided to a borrower company engaged in:

  • Developing or
  • Operating and maintaining, or
  • Developing, operating and maintaining

any infrastructure facility that is a project in any of the following sectors:

(a)   a road, including toll road, a bridge or a rail system;

(b)   a highway project including other activities being an integral part of the highway project;

(c)   a port, airport, inland waterway or inland port;

(d)     a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system;

(e)telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services;

(f) an industrial park or special economic zone;

(g) generation or generation and distribution of power;

(h)transmission or distribution of power by laying a network of new transmission or distribution lines; [(ha) laying down and/or maintenance of gas, crude oil and petroleum pipelines] *

(i)construction relating to projects involving agro-processing and supply of inputs to agriculture;

(j)  construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality; and

(k) [ ** ]

(l)any other infrastructure facility of similar nature.

* Inserted w.e.f. 11 February 2010.

** Construction of educational institutions and hospitals – deleted w.e.f. 11 February 2010.

Requirements for IFC:

  • IFC shall have “net owned fund” of Rs. 3 billion or more.

Under NBFC Directions, “Systemically important non-deposit taking NBFC” [NBFCs-ND-SI] has been defined to mean a NBFCs

  • not accepting / holding public deposits and
  • having total assets of Rs 1 billion or more as per latest audited balance sheet.

Having regard to the condition that the net owned fund of IFC to be not less than Rs. 3 billion, it follows that an IFC would be a NBFCs-ND-SI.

  • IFC shall have minimum credit rating of ‘A’ or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accrediting rating agencies; and
  • IFC shall have Capital to Risk Assets Ratio [CRAR] of 15% (with a minimum Tier I capital of 10%);
  • IFC shall not accept deposits from the public.

NBFC satisfying the above conditions may approach the Regional Office of RBI for classification as IFC. The application is to be supported by the certificate from Statutory Auditors of such NBFC confirming the asset / income pattern of the company as on March 31 of the latest financial year.

Concentration of credit limits for IFCs relaxed:

Limits on lending to a single borrower or single group of borrowers by IFC have been relaxed. IFC may lend to –

  • any single borrower upto 25% of its owned fund;
  • any single group of borrowers upto 40% of its owned fund.

Further, IFC may lend to and invest in (loans / investments taken together) –

  • any single borrower upto 30% of its owned fund;
  • any single group of borrowers upto 50% of its owned fund.

Present norms relating to concentration of credit limits in respect of infrastructure loan as laid out in NBFC Directions will continue to be applicable to NBFCs-ND-SI that do not meet the criteria to be classified as IFC.

Existing provisions of NBFC Directions which are based on asset specification viz. income recognition, asset classification and provisioning norms shall be applicable to IFC.

Comparative chart of concentration of credit and investment:

A comparative chart showing limits on concentration of credit and investments in respect of various NBFCs-ND-SI after the amendment of NBFC Directions is as under:

Credit / Investment AFC / LC/ IC (limits as a % to     its    owned
fund)
AFC / LC/ IC giving loans / making investments in infrastructure sector (note 1) (limits as a % to    its   owned
fund)
IFCs

(limits    as   a

%      to      its
owned fund)

Lending to
any single borrower 15% 20% 25%
any single group of borrowers 25% 35% 40%
Investments in (note 2)
shares of another company 15% 20% 15%
shares of single group of companies 25% 35% 25%
Lending to and investments in
single party 25% 30% 30%
single group of parties 40% 50% 50%

Notes:

1)       The higher limits would be available only for exposure to infrastructure related loan and / or investments.

2)       Investment limits will not be applicable for investment in the equity capital of an insurance company upto the extent permitted by RBI

3)       In case of AFC, above limits to a single party / single group of parties may be increased by 5% of its owned funds in exceptional circumstances with the approval of such AFC’s Board of Directors.

4)       NBFCs-ND-SI not accessing public funds (commercial papers, public deposits, debentures, inter-corporate deposits and bank finance), either directly or indirectly, may make an application to RBI for modifications in the above limits.

Risk weights and exposure norms for bank exposure to IFCs:

RBI has, on 12 February 2010, also made separate amendments to the master circulars to banks with regard to assigning risk weightage and exposure norms for banks’ exposure to IFCs and bank finance to NBFCs. Accordingly –

  • the banks’ exposure to IFCs will be risk weighted as per the rating assigned to IFCs by rating agencies registered with SEBI and accredited by RBI. Banks are required to assign risk weight similar to corporate / corporate bonds while computing capital for credit risk and specific risk under market risk.
  • bank’s exposure to IFCs should not exceed
  • 15% of its capital funds as per its last audited balance sheet,
  • 20% of its capital funds, if such exposure is on account of funds on-lent by IFCs to the infrastructure sector.

Conclusion:

  • Amendments to NBFC Directions would enable IFCs to provide a higher credit facility to a borrower in the infrastructure sector. The relaxation takes into account the need to fund large capital requirements entailed in development, operations and maintenance of an infrastructure project.
  • Above relaxation would encourage banks to take exposures to IFCs as the banks would be assured of minimum ‘A’ grade quality at the time of disbursal of funds.
  • Combined effect of above measures would lead to additional funds being made available to projects in infrastructure sector through non-banking channels.

Sources:

(i) Notification No. DNBS. 213 / CGM(ASR) -2010 dated 11 February 2010 issued by RB!

(ii) Circular No. DNBS.PD. CC No. 168 / 03.02.089 /2009-10 dated 12 February 2010 issued by RB!. (iii) Circular No. DBOD. No. BP. BC. 74 /21.04.172/ 2009-10 dated 12 February 2010 issued by RB!.

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