The Reserve Bank of India (RBI) has issued a notification outlining a new regulatory framework for Non-Banking Financial Companies (NBFCs) on October 19, 2023 Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 RBI/DoR/2023-24/105 DoR.FIN.REC. No.45/03.10.119/2023-24 clearing the ambiguity created with the introduction of Scale based regulation.

Earlier, NBFCs were classified into two categories: Systemically important (SI) and Non-Systemically Important (Non-SI). However, starting from October 2022, the RBI introduced a new classification system based on layers: Base, Middle, Upper, and Top. Regulatory structure for Non-Banking Financial Companies (NBFCs) shall comprise of four layers based on their size, activity, and perceived riskiness. It created ambiguities in the applicability of regulatory rules.

The terms “Base layer” and “Middle layer” were related with Non-Systemically Important (Non-SI) and Systemically Important (SI) NBFCs. When classifying NBFCs based on asset size, those with assets under Rs. 500 crores were considered Non-SI’s, while those with assets over Rs. 500 crores were classified as SIs.

Scale Based Regulation Framework introduced a different criterion. Accordingly, NBFCs with assets less than Rs. 1000 crores are categorized as Base Layer entities, while those with assets exceeding Rs. 1000 crores are classified as Middle Layer entities. This created confusion for NBFCs with assets size falling between Rs. 500 crores and Rs. 1000 crores.

The RBI clarified that all references to NBFC-ND (non-systemically important non-deposit taking NBFC) would now be referred to as NBFC-BL (Base Layer), and all references to NBFC-D (deposit-taking NBFC) and NBFC-ND-SI (Systemically Important Non-deposit taking NBFC) would be known as NBFC-ML or NBFC-UL (Middle Layer or Upper Layer), depending on the case. Furthermore, it specified that existing NBFC-ND-SI with asset sizes of ₹ 500 crore and above but below ₹1000 crore (except those necessarily categorized as Middle Layer) would be reclassified as NBFC-BL.

The SBR Master Directions is divided into sections for different categories of NBFCs, based on size as well as function which is numerated as below:

  1. Regulations for Base Layer:

The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1,000 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) NBFC not availing public funds and not having any customer interface.

  1. Regulations for Middle Layer (this would be in addition to the regulations for BL):

The Middle Layer shall consist of :

  • all deposit taking NBFCs (NBFCs-D), irrespective of asset size,
  • non-deposit taking NBFCs with asset size of ₹1,000 crore and above and
  • NBFCs undertaking the following activities
  • Standalone Primary Dealer (SPD),
  • Infrastructure Debt Fund-Non-Banking Financial Company (IDF-NBFC),
  • Core Investment Company (CIC),
  • Housing Finance Company (HFC) and (v) Non-Banking Financial Company-Infrastructure Finance Company (NBFC-IFC)
  1. Regulations for Upper Layer (this would be in addition to the regulations for BL and ML):

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 Annex I to these Directions. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.

  1. Regulations for Top Layer (to be specifically communicated upon classification in TL):

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.

  1. Categorisation of NBFCs carrying out specific activity:

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 NBFC not availing public funds and not having any customer interface will always remain in the Base Layer of the regulatory structure.

NBFC-D, CIC, NBFC-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., NBFC-Investment and Credit Companies (NBFCICCs), NBFC-Micro Finance Institutions (NBFC-MFIs), NBFC-Factors and Mortgage Guarantee Companies (MGCs) 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.

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