The Reserve Bank on 26 December 2011 tightened the prudential norms for the non-banking financial companies Non-banking Financial Companies under which the NBFCs will have to account for risks towards off-balance sheet items while computing capital adequacy requirement.
The Non-banking Financial Companies can thus participate in the credit default swap market only as users. As users, the NBFCs would be permitted only to hedge their credit risk on corporate bonds they hold. However, they are not permitted to sell protection. They are therefore not permitted to enter into short positions in the credit default contracts. NBFCs are however permitted to exit their bought CDS positions by unwinding them with the original counter party or by assigning them in favour of the buyer of the underlying bond.
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RBI also tightened the capital adequacy norms for all Non-banking Financial Companies. The rule tightening exercise comes in the wake of their stepped-up exposure to off- balance sheet items.
The RBI revised capital adequacy norms for non-banking finance companies Non-banking Financial Companies with an objective to improve their capacity and help manage off-balance sheet exposure.
The regulatory framework was expanded to have greater granularity in the risk weights and credit conversion factors for different types of off-balance sheet items.
The RBI prescribed that the total risk-weighted off-balance sheet credit exposure will be calculated as the sum of the risk-weighted amount of the market-related and non-market related off-balance sheet items. The RBI specified that for the off-balance sheet items already contracted by NBFCs, the risk weight shall be applicable with effect from the financial year beginning 1 April 2012.
As per the apex bank, off-balance sheet exposures of Non-banking Financial Companies have increased with the increased participation in the designated currency options and futures and interest rate futures as clients for the purpose of hedging their underlying exposures.
Asset liability management for NBFCs had become complex and large, requiring strategic management with a greater use of derivatives.
In the normal course of their business, NBFCs are exposed to credit and market risks due to asset-liability transformation as the Indian markets are now more integrated with global ones.
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