RBI announces scale-based regulatory structure; here’s how NBFCs will be classified

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The Reserve Bank of India (RBI) has announced a four-layer scale-based regulatory framework for better monitoring of the Non-banking financial companies in the country. The new regulations will come into effect from October 1, 2022. The RBI has also set a limit of Rs 1 crore per borrower for financing subscription to Initial Public Offer (IPO). This ceiling will come into effect from April 1 next year and the NBFCs are allowed to fix more conservative limits, the bank regulator said in its statement.

The announcement comes after the RBI launched a discussion paper titled “Revised Regulatory Framework for NBFCs — A Scale-based Approach” for public comment in January this year.

Classification of NBFCs

The regulatory framework will cover different aspects of NBFCs including capital requirement, governance standards and prudency norms among others. The four layer structure for NBFCs will be decided based on their size, activity and perceived risk.

As per these layers, the NBFCs would be identified accordingly. There will be a Base Layer followed by Middle, Upper and Top layers. The NBFCs in Base Layer will be known as NBFC-BL while others will be similarly categorized as per their respective layers.

The Base Layer will be the bottom layer and the non-deposit-taking NBFCs with assets upto Rs 1000 crore will belong to this category. This layer will also include the peer-to-peer (P2P) lending firms, account aggregator firms, non-operative financial holding companies (NOFHC) and entities that do not use public funds or have any kind of client interface.

The Deposit-taking NBFCs, regardless of asset size; non-deposit-taking enterprises with assets of Rs 1,000 crore or more and home finance firms will make up the Middle Layer. This category will also include stand-alone primary dealers, infrastructure debt fund investment businesses and infrastructure financing organisations. The government-owned NBFCs will be put in the base or middle layer.

The upper tier will comprise NBFCs that justify enhanced regulatory requirements based on a set of characteristics and scoring system. Regardless of other factors, the top-10 qualifying NBFCs in terms of asset size will always be in the Upper Layer.

If the regulator believes there is a significant increase in the potential risk from certain NBFCs in the Upper Layer, the Top Layer can be occupied. The RBI expects the top layer to remain empty.