Scale-Based Regulation for NBFCs: New 4-Layer Framework

RBI/2021-22/112 DOR.CRE.REC.No.60/03.10.001/2021-22 October 22, 2021 All Non-Banking Financial Companies Madam / Sir, Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs The contribution of NBFCs towards supporting real economic activity and their role as a supplemental channel of credit intermediation alongside banks is well recognised. Over the years, the sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector. Many entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile. 2. Pursuant to the announcement made in the Statement on Developmental and Regulatory Policies dated December 04, 2020 , a discussion paper titled ‘ Revised Regulatory Framework for NBFCs - A Scale-based Approach ’ was issued for public comments on January 22, 2021. Based on the inputs received, it has now been decided to put in place a revised regulatory framework for NBFCs ( Annex ). 3. As the SBR framework encompasses different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, etc., it has been decided to first issue an integrated regulatory framework for NBFCs under SBR providing a holistic view of the SBR structure, set of fresh regulations being introduced and respective timelines. Detailed guidelines as delineated in the Annex, will be issued subsequently. 4. These guidelines shall be effective from October 01, 2022. The instructions relating to ceiling on IPO funding given vide para 3.1(d) of the Annex shall come into effect from April 01, 2022. Yours faithfully, (Manoranjan Mishra) Chief General Manager Annex Framework for Scale Based Regulation for Non-Banking Financial Companies Section I 1. Regulatory Structure for NBFCs 1.1 Regulatory structure for NBFCs shall comprise of four layers based on their size, activity, and perceived riskiness. NBFCs in the lowest layer shall be known as NBFC - Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively. The Top Layer is ideally expected to be empty and will be known as NBFC - Top Layer (NBFC-TL). Details of NBFCs populating the various layers shall be as prescribed in paras 1.2 to 1.6 below: Base Layer 1.2 The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1000 crore and (b) NBFCs undertaking the following activities- (i) NBFC-Peer to Peer Lending Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface 1 . Middle Layer 1.3 The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ₹1000 crore and above and (c) NBFCs undertaking the following activities (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund - Non-Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs). Upper Layer 1.4 The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology as provided in the Appendix to this circular. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor. Top Layer 1.5 The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer. Categorisation of NBFCs carrying out specific activity 1.6 As the regulatory structure envisages scale based as well as activity-based regulation, the following prescriptions shall apply in respect of the NBFCs NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will always remain in the Base Layer of the regulatory structure. NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the Base layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer. The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework. Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case may be. They will not be placed in the Upper Layer till further notice. Section II 2. Scale Based Regulatory Framework 2.1 References to NBFC-ND, NBFC-ND-SI & NBFC-D - From October 01, 2022, all references to NBFC-ND shall mean NBFC-BL and all references to NBFC-D and NBFC-ND-SI shall mean NBFC-ML or NBFC-UL, as the case may be 2 . 2.2 Progressive application of regulations - Regulatory revisions applicable to lower layers of NBFCs will automatically be applicable to NBFCs residing in higher layers, unless stated otherwise. 2.3 Regulatory guidelines for NBFCs in Base Layer - NBFCs in the Base Layer (NBFC-BL) shall be subject to regulations as currently applicable to NBFC-ND, except for the changes mentioned below at paras 3.1 and 3.2. NBFC-P2P, NBFC-AA, and NOFHC shall be subject to extant regulations governing them 3 . 2.4 Regulatory guidelines for NBFCs in Middle Layer - NBFCs in the Middle Layer (NBFC-ML) shall continue to follow regulations as currently applicable for NBFC-ND-SIs, NBFC-Ds, CICs, SPDs and HFCs, as the case may be, except for the changes mentioned below at paras 3.1 and 3.2 . 2.5 Regulatory guidelines for NBFCs in Upper Layer - NBFCs lying in the Upper Layer (NBFC-UL) shall be subject to regulations applicable to NBFC-ML in addition to the changes mentioned below at paras 3.1 and 3.2 . 3. Regulatory changes under Scale Based Regulation (SBR) 3.1 Regulatory changes under SBR for all the layers in the regulatory structure a) Net Owned Fund – Regulatory minimum Net Owned Fund (NOF) for NBFC-ICC, NBFC-MFI and NBFC-Factors shall be increased to ₹10 crore. 4 The following glide path is provided for the existing NBFCs to achieve the NOF of ₹10 crore: NBFCs

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2021-22/112 · issued 22 Oct 2021. The plain-English explanation above is BankPulse’s own independent summary.

🖨 Print / Save as PDF 🔗 Copy link☆ Save for later

Topics: NBFC Regulations

Key dataSee the live numbers behind this topic: NPA / Asset-Quality Tracker, Bank Health Scores — updated from official RBI data.

Key termsPlain-English definitions of terms in this circular — see the full Indian banking glossary. NBFC · CRAR (Capital adequacy) · Gross NPA (GNPA) · Wilful defaulter