BofA gives big Covid bonus to 1.7 lakh staff Will RBI’s proposed NBFC framework be effective?
Bank of America is rewarding its over 1.7 lakh staff worldwide, including over 24,000 in India, with a cash award of USD 750 each to those earning under USD 1 lakh in annual compensation for the appreciation of their work through the pandemic.
Called 'delivering together' compensation awards, the bank expects over 97 per cent of its employees to get the special one-time cash bonus.
In an memo sent to the employees worldwide, Bank of America chief executive Brian Moynihan said in appreciation for the outstanding efforts, the board have decided to recognise employees with 'delivering together' compensation awards. All eligible employees with USD 1 lakh or less in annual total compensation will be paid a cash bonus of USD 750 each.
The liquidity crisis before the pandemic made one thing clear. The NBFCs can no longer enjoy the regulator y leeways. They have to tighten their approach towards lending and other operational parameters. And learn to sustain themselves during the volatile periods.
The RBI’s recent discussion paper is a step in that direction. The central bank in this paper has proposed tighter regulations for the NBFCs. It argues in favour of bringing a scale-based structure. And, argues in favour of stricter governing norms for the NBFCs.
What is a scale-based structure?
Under the suggested framework, the largest 25-30 NBFCs would be subjected to bank-like regulations.
The RBI has recommended splitting of NBFCs into four categories depending on their size and systemic relevance. These four categories would include- base layer, middle layer, the upper layer, and top layer.
NBFC categorization:
The base layer would include NBFCs with an asset size of up to Rs 1,000 crore. The largest number of NBFCs will fall in this categor y. They will have the least stringent regulations. A total of 9209 out of 9,234 nondeposit taking NBFCs fall into this categor y. These NBFCs will have the least stringent regulation.
The middle layer would include all 'systemically important' and deposit-taking NBFCs. The NBFCs in this categor y will see the least disruption in terms of regulator y changes.
Upper Layer will be made up of the top 25 to 30 NBFCs. The RBI has proposed to tighten the regulations for this categor y. The top layer will be kept empty for now. If any upper layer NBFC is posing an extreme risk or deteriorating, they can be shif ted to this layer.
Upper layer: Bank like regulation:
The RBI has proposed banks like regulations for about 25-30 NBFCs. For this basket,
Core Tier-1 Equity is proposed to be set at 9% Standard asset provisioning norms would be streamlined with that of banks. At present NBFCs maintain standard asset provisioning of 0.4%.
They would have to maintain a higher asset provisioning ratio for high-risk categories like real estate and infrastructure.
Large exposure framework, as applicable to banks, can be extended for these NBFCs as well.
Tighter governance for mid-level NBFCs:
No changes are proposed in the capital-to-risk-assets ratio (CRAR) of 15% with a minimum Tier-I ratio of 10%.
Merger of lending and investment into a single exposure limit. It is prescribed at 25% for a single borrower and 40% for the group of borrowers. Tighter corporate governance norms.
Apart from this, certain common regulator y restrictions are proposed for mid and upper layer NBFCs. For instance, these NBFCs cannot provide loans to companies for the buy-back of shares/securities. Also, IPO financing by NBFCs will be subject to a ceiling of Rs 1 crore per individual. Also, to finance the land acquisition, the NBFCs would need to internally fix the commercial real estate exposure ceiling
The proposed changes are unlikely to have any significant impact on top NBFCs. They are maintaining strong capital adequacy above the proposed CET 1 threshold of 9%. Hence, they are well-capitalised. These NBFCs remain comfortable with higher standard asset provisioning.
Closing comments:
The proposed changes are unlikely to have any significant impact on top NBFCs. They are already maintaining strong capital adequacy above the proposed CET 1 threshold of 9%. Hence, they are wellcapitalized.
These NBFCs remain comfortable with higher standard asset provisioning.
However, we could see GNPAs based on lax underwriting and provisioning policies that are currently in practice.
Further, the implementation of banking like regulations will enhance data availability. It will add to the transparency from a longer-term regulator y perspective. It will enable the real-time monitoring of asset quality at a customer level across NBFCs.