What changed
RBI replaced the earlier NBFC regulatory structure with a four-layer scale-based framework (SBR). NBFCs are now categorized as Base Layer (non-deposit taking NBFCs with asset size below ₹1000 crore or specific activity types), Middle Layer (deposit-taking NBFCs, non-deposit taking with assets ₹1000 crore and above, and certain activity-based NBFCs), Upper Layer (identified by RBI based on parameters including top 10 by asset size), and Top Layer (for those posing elevated systemic risk).
What it means for you
Banks and lenders dealing with NBFCs must reassess counterparty risk based on the new layer classification, as capital and governance requirements will vary by layer. The framework aims to align regulation with NBFCs' evolving risk profiles, potentially impacting credit pricing and exposure limits. Lenders should monitor NBFC layer assignments to adjust lending and investment strategies accordingly.
What you must do
- Review your NBFC counterparties' new layer classification (Base, Middle, Upper, Top) to understand their regulatory requirements.
- Update credit risk assessment models to incorporate SBR-based capital and governance standards for NBFC exposures.
- Prepare for IPO funding ceiling from April 1, 2022, as per para 3.1(d) of the annex.
- Engage with NBFC partners to confirm their layer status and compliance timelines.
Who it affects
All Non-Banking Financial Companies (NBFCs), Banks with NBFC exposures, Lenders and investors in NBFC securities, Regulatory compliance teams at NBFCs
What determines an NBFC's layer under the new framework?
Layer classification is based on asset size, deposit-taking status, and activity type. For example, non-deposit taking NBFCs with assets below ₹1000 crore are in the Base Layer, while those with assets ₹1000 crore and above are in the Middle Layer. The Upper Layer includes NBFCs identified by RBI using a scoring methodology, with the top 10 by asset size always included.
When do the new SBR guidelines take effect?
The guidelines are effective from October 1, 2022. However, the ceiling on IPO funding mentioned in para 3.1(d) of the annex comes into effect from April 1, 2022.
What is the Top Layer and when is it used?
The Top Layer is intended to remain empty but can be populated if RBI determines that specific NBFCs in the Upper Layer pose substantially increased systemic risk. Such NBFCs would be moved from the Upper Layer to the Top Layer.