Even the as they are readying to ring in the new year with quite optimism, the Reserve Bank of India (RBI) has dampened their spirits by tightening rules for the non-banking finance companies.
For one, the apex bank has made it clear that the NBFCs could participate in the credit default swap market only as users.
“As users, they (NBFCs) would be permitted only to hedge their credit risk on corporate bonds they hold,'' the RBI said. However, they are not permitted to sell protection. Hence, “they are not permitted to enter into short positions in the credit default contracts,'' it made it clear. But they “are permitted to exit their bought CDS positions by unwinding them with the original counter-party or by assigning them in favour of buyer of the underlying bond,'' the apex bank said.
For another, the RBI also has tightened the capital adequacy norms for all NBFCs. The rule tightening exercise comes in the wake of their stepped-up exposure to off- balance sheet items. The RBI has tightened the off-balance sheet regulatory framework by prescribing that the total risk weighted off-balance sheet credit exposure be calculated as the sum of the risk weighted amount of the market-related and non-market related off-balance sheet items. For the off-balance sheet items already contracted by NBFCs, the risk weight shall be applicable with effect from the financial year beginning April 1, 2012.
“Off-balance sheet exposures of NBFCs 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,'' the RBI said.