Background:
Over the years the Non-Banking Financial Companies (NBFC) sector has evolved considerably in terms of size, operations, technological sophistication, and entry into newer areas of financial services and products. The number of NBFCs as well as the size of the sector have grown significantly. There is an increasingly complex web of interlinkages of the industry with banks, capital markets, and other financial sector entities, on both sides of the balance sheet. To regulate and supervise NBFCs, the Reserve Bank has implemented differential regulation since 2006 linked to their size, in a limited manner.
The fundamental premise has, however, been less rigorous regulation for the sector in general. However, due to the recent stress observed in the NBFC sector, and the contagion risk it posed to other entities due to the interconnectedness of NBFCs in the financial system, there was a need to protect the deposits that investors placed with the NBFCs. Accordingly, the regulatory approach adopted for NBFCs was re-examined to reorient it to keep pace with the changing realities in the financial sector.
To develop a strong and resilient financial system, in October 2021, the Reserve Bank of India (RBI) prescribed a ‘scale-based regulation’ for the NBFC sector. The Scale-Based Regulatory (SBR) approach renders the regulation and supervision of the NBFCs to be a function of their size, activity, and perceived riskiness. These regulations would apply to NBFCs effective 1st October 2022. However, an amendment regarding the ceiling on IPO funding is applicable from 1st April 2022.
REGULATORY STRUCTURE OF NBFCS:
The regulatory structure for NBFCs shall comprise of four layers based on their size, activity, and perceived riskiness. The names of these layers were given below:
- NBFCs in the lowest layer shall be known as NBFC – Base Layer (NBFC-BL).
- NBFCs in the middle layer shall be known as NBFC – Middle Layer (NBFC-ML)
- NBFC – Upper Layer shall be known (NBFC-UL) upper layer.
- The Top Layer is ideally expected to be empty and will be known as NBFC – Top Layer (NBFC-TL).
Details of NBFCs covered under these various layers shall be listed in the following table:
Regulatory changes under the scale-based regulatory framework:
The scale-based regulatory framework envisages a progressive increase in the intensity of regulations. Therefore, regulatory revisions applicable to lower layers of NBFCs will automatically apply to NBFCs residing in higher layers, unless stated otherwise. The regulatory revisions applicable to the various layers of NBFC are given in the table below:
Regulatory guidelines for NBFCs under Top Layer –
NBFCs falling in the Top Layer of the regulatory structure shall, inter alia, be subject to higher capital charges. Such higher requirements shall be specifically communicated to the NBFC at the time of its classification in the Top Layer. There will be enhanced and intensive supervisory engagement with these NBFCs.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
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