RBI has stated that the Upper and Middle Layer NBFCs will have to follow Internal Capital Adequacy Assessment Process (ICAAP).
What is ICAAP?
ICCAP is Internal Capital Adequacy Assessment Process (ICAAP).
The ICAAP will inform NBFC about
Risks associated with assets.
The way management intends to mitigate those risks
Amount of current and future capital necessary.
The objective is to ensure that NBFCs hold adequate capital to support the relevant risks in their business.
Why RBI proposes ICAAP?
Size and nature of NBFC - The RBI is concerned about the growing size of NBFCs and their interconnectedness with other segments of the financial system.
Some larger NBFCs are equivalent to smaller, new generation private banks in terms of size and complexity of business.
The risk-management of these NBFCs is similar to commercial banks counterparts.
The impact of pandemic – Pandemic has led to substantial reduction in consumption demand which have resulted in slowdown in credit growth.
The impact is visible on asset quality, profitability, and capital position of NBFCs.
The profitability of NBFC has dipped in 2021.
Deterioration in credit quality - This deterioration in credit quality in the MSME portfolio of NBFCs has drawn regulatory attention.
The concern is about Asset Liability Management (ALM) and credit risk for these NBFCs.
What are the key elements of ICAAP?
The key elements of ICAAP policy are:
Risk Appetite Statement – It provides the aggregate level and types of risk associated with a financial institution.
Risk Profile Analysis - It will indicate the ability to accept or reject risks.
Capital Management.
Capital Strategy and Targets
ICAAP reporting and Independent Review.
What NBFC needs to do?
NBFCs has to
establish a board-approved policy and framework of ICAAP
assess their existing and future capital requirements based on credit, market, operational and other residual risks.
The risk appetite defined by the board has to be reviewed periodically to take into cognizance the changing business perspective of the environment and hence of the NBFC.
An assessment of the current and desired risk profile has to be made.
The assessment states
The level of risk the NBFC is willing to take.
The action plan to achieve it.
What are the measures taken by RBI to regulate NBFCs?
The ICAAP policy and framework laid down by the NBFCs will be subject to regulatory oversight.
RBI has permitted restructuring of temporarily impaired MSME loans up to 25 crore.
It has been further boosted by Emergency Credit Line Guarantee Scheme (ECLGS) disbursements to eligible categories.
RBI has now put in place a PCA framework for NBFCs as an early supervisory intervention which will be effective from March 31, 2022.
