RBI’s New Regulatory Framework For Non-Banking Financial Companies: An Overview

Posted On - 5 February, 2024 • By - Vivek Jain

In a significant stride towards regulatory efficiency, the Reserve Bank of India (RBI) has ushered in a new era for Non-Banking Financial Companies (NBFCs) with the Scale Based Regulation (SBR) Framework, announced on October 19, 2023. The RBI, known for its pivotal role in overseeing the NBFC sector, has proven its proactive stance by adapting regulations to keep pace with the industry’s evolution. A pivotal change occurred in October 2022 when the RBI replaced the traditional classification of NBFCs into systemically important and non-systemically important with a layered approach: base, middle, upper, and top. This transition, aimed at aligning regulations with the sector’s dynamics, introduced progressive changes but also brought about ambiguities in the applicability of regulatory rules.

The SBR Framework’s departure from the previous asset size criteria intensified the regulatory landscape. Formerly, NBFCs with assets under Rs. 500 crores were non-systemically important, while those exceeding Rs. 500 crores fell under the systemically important category. The SBR Framework, however, shifted the goalposts by categorizing NBFCs with assets less than Rs. 1000 crores as Base Layer entities and those surpassing Rs. 1000 crores as Middle Layer entities. This, unfortunately, created a grey area for NBFCs with assets ranging from Rs. 500 crores to Rs. 1000 crores. Responding swiftly to the need for clarity, the RBI issued the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023, commonly referred to as the SBR Master Directions. Effective immediately, this directive seeks to consolidate various regulations for NBFCs across different scales and functions.

The SBR Master Directions bring a breath of fresh air, offering a streamlined regulatory framework for NBFCs of different sizes. Categorized into sections for different NBFC classifications based on size and function, these directions provide a clear roadmap for compliance, ensuring transparency and consistency in operations. The detailed breakdown includes regulations for the Base Layer, Middle Layer (in addition to regulations for the Base Layer), Upper Layer (in addition to regulations for the Base and Middle Layers), Top Layer (communicated upon classification in Top Layer), Specific Directions for Microfinance Institutions (MFIs), Factors, NBFCs registered under the Factoring Act, and Infrastructure Development Funds (IDFs). While the SBR Master Directions ensure a comprehensive approach, specific regulations issued by the RBI for entities such as Housing Finance Companies, Core Investment Companies, NBFC-P2P, NBFC-Account Aggregators, deposit-taking NBFCs, Residuary Non-Banking Companies, Mortgage Guarantee Companies, and Asset Reconstruction Companies remain relevant.

In a bid to harmonize and simplify nomenclature, the RBI clarified in a previous notification dated October 22, 2021, that references to NBFC-ND (non-systemically important non-deposit taking NBFC) would now be known as NBFC-BL. References to NBFC-D (deposit-taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) would be termed NBFC-ML or NBFC-UL, depending on the case. Existing NBFC-ND-SI with asset sizes between ₹500 crores and below ₹1000 crores (except those necessarily categorized as Middle Layer) would be reclassified as NBFC-BL.

However, a closer examination of the SBR master directions reveals that guidelines typically associated with systemically important NBFCs are retained for Middle Layer entities with assets exceeding ₹500 crores. These include the prudential framework for resolution of stressed assets, norms for restructuring advances, identification of non-cooperative borrowers, refinancing of project loans, and frameworks for revitalizing distressed assets. Yet, as the financial landscape continues to evolve, it’s essential to note that certain regulations issued under the SBR Framework, such as compliance function, the role of Chief Compliance Officer (CCO), and the implementation of ‘Core Financial Services Solution,’ have not been consolidated in the SBR Master Directions.

In conclusion, while the SBR Master Directions represent a remarkable step towards regulatory clarity and uniformity for NBFCs, ongoing reviews and refinements may be necessary to address any remaining gaps. The RBI’s commitment to a dynamic regulatory environment ensures that the NBFC sector in India remains well-updated and robust in the face of evolving financial dynamics.