Introduction to RBI – NBFC Scale Based Regulation

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Introduction to RBI – NBFC Scale Based Regulation

The Reserve Bank of India’s (RBI) regulations for Non-Banking Financial Companies (NBFCs) based on their size, activities, and risk levels. These regulations, known as the “Master Direction- Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023,” are effective immediately.

Regulatory Structure under Scale Based Regulation

The regulatory framework categorizes NBFCs into four layers based on their size, activities, and riskiness:

Base Layer (NBFCs-BL):

  • Non-deposit taking NBFCs with assets below ₹1,000 crore.
  • NBFCs engaged in specific activities such as Peer to Peer Lending Platform (NBFC-P2P), Account Aggregator (NBFC-AA), Non-Operative Financial Holding Company (NOFHC), and NBFCs not availing public funds without customer interface.

Middle Layer (NBFCs-ML):

  • Deposit-taking NBFCs (NBFCs-D) irrespective of asset size.
  • Non-deposit taking NBFCs with assets of ₹1,000 crore and above.
  • NBFCs involved in activities like Standalone Primary Dealer (SPD), Infrastructure Debt Fund-Non-Banking Financial Company (IDF-NBFC), Core Investment Company (CIC), Housing Finance Company (HFC), and Infrastructure Finance Company (NBFC-IFC).

Upper Layer (NBFCs-UL):

  • NBFCs identified by the RBI based on risk parameters and scoring methodology.
  • The top ten NBFCs by asset size always belong to this layer.

Top Layer (NBFCs-TL):

  • Ideally remains empty but can be populated if specific NBFCs in the Upper Layer pose substantial systemic risk.

Categorization of NBFCs carrying out specific activities:

  • NBFC-P2P, NBFC-AA, NOFHC, and NBFCs not availing public funds without customer interface always remain in the Base Layer.
  • NBFC-D, CIC, NBFC-IFC, and HFC are placed in the Middle Layer or Upper Layer, depending on the circumstances. SPD and IDF-NBFC always belong to the Middle Layer.
  • Other NBFCs, such as Investment and Credit Companies (NBFC-ICCs), Micro Finance Institutions (NBFC-MFIs), Factors, and Mortgage Guarantee Companies (MGCs), can be placed in any layer based on scale and regulatory criteria.
  • Government-owned NBFCs are placed in the Base Layer or Middle Layer, as applicable, until further notice.

References to NBFC-ND, NBFC-ND-SI, and NBFC-D:

From October 1, 2022, NBFC-ND refers to NBFC-BL, and NBFC-D and NBFC-ND-SI refer to NBFC-ML or NBFC-UL, as applicable.

Multiple NBFCs in a Group – Classification in Middle Layer:

  • NBFCs within a common Group or floated by common promoters are not viewed individually. Their total assets are consolidated to determine Middle Layer classification.
  • If the consolidated assets exceed ₹1,000 crore, certain categories like NBFC-ICC, NBFC-MFI, NBFC-Factor, and MGC within the Group are classified into the Middle Layer.

Criteria for deciding NBFC-ML status:

  • When an NBFC reaches ₹1,000 crore or more in assets, it must adhere to regulations applicable to NBFCs-ML, regardless of the date of reaching this threshold.
  • If an NBFC’s assets temporarily fall below ₹1,000 crore due to temporary fluctuations, it must still comply with regulations for NBFCs-ML until its next audited balance sheet is submitted to the RBI.

Applicability as per categories of NBFCs:

These Directions apply to various categories of NBFCs, including NBFC-D, NBFC-ICC, NBFC-Factor, NBFC-MFI, NBFC-IFC, and IDF-NBFC, as well as government-owned NBFCs and others, as specified.

Other Directions issued by Department of Regulation:

NBFCs must also comply with other RBI Directions, such as KYC, Transfer of Loan Exposures, Securitization of Standard Assets, Regulatory Framework for Microfinance Loans, Credit Card and Debit Card Issuance and Conduct, and any additional guidelines issued by the RBI’s various departments.

Regulations applicable for NBFC-BL

Regulations applicable for NBFC-ML

Regulatory Instructions for NBFC-UL

Directions for NBFC – Micro Finance MFIs

Specific Directions for NBFC-Factors and NBFC-ICCs

Specific Directions for Infrastructure Debt Funds IDFs-NBFC

Scoring Methodology for Identification of NBFC as NBFC-UL

Regulatory Guidance on Implementation of Ind AS by NBFCsv

Norms on Restructuring of Advances by NBFCs

Early Recognition of Financial Distress

Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries

Guidelines on Liquidity Risk Management Framework

Disclosures in Financial Statements – Notes to Accounts of NBFCs

Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs

Guidelines for Credit Default Swaps – NBFCs as Users

Guidelines on Private Placement of NCDs by NBFCs

Guidelines for Entry of NBFCs into Insurance

Guidelines on Issue of Co-Branded Credit Cards

Guidelines on Distribution of Mutual Fund Products by NBFCs

Guidelines on Perpetual Debt Instruments

Guidelines on Liquidity Coverage Ratio (LCR)

Balance Sheet Disclosure Guidelines for NBFCs in Middle Layer and Above

Self-Regulatory Organization (SRO) for NBFC-MFIs – Criteria for Recognition