The Reserve Bank of India (RBI) is the regulatory authority for all Non-Banking Financial Companies in India. To align the regulatory framework of the existing NBFC’s with their changing risk pattern, the RBI has brought in the Scale Based Regulation (SBR), which is applicable from 1st October,2022. The instructions relating to IPO ceiling limits are already applicable from 1st April,2022. This paper is an attempt to summarize the main points of the SBR of RBI.
The following are main points of this SBRs:
1. Regulatory Structure-Categorization of the NBFC’s
All NBFC’s shall be classified into 4 (four) layers based on their size, activity, and perceived riskiness. The following table shows the layers and their components:
| Layer | NBFC’s classiϐied as | Component NBFC’s |
| Base Layer | NBFC – Base Layer (NBFC-BL) | (a) non-deposit taking NBFCs below the asset size of ₹1000 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) NBFCs not availing public funds and not having any customer interface1 |
| Middle Layer | NBFC – Middle Layer (NBFC-ML) | The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ₹1000 crore and above and (c) NBFCs undertaking the following activities (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs). |
| Upper Layer | NBFC – Upper Layer (NBFC-UL) | 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 by the RBI. |
| Top Layer | NBFC – Top Layer (NBFC-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. |
2. Regulatory Structure-Categorisation of NBFCs carrying out speciϐic activity
As the regulatory structure envisages scale based as well as activity-based regulation, the following prescriptions shall apply in respect of the NBFCs
| a. | NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will always remain in the Base Layer of the regulatory structure. |
| b. | NBFC-D, CIC, 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. |
| c. | The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework. |
| d. | 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. |
3. Regulatory Framework and guidelines-basic parameters
| References to NBFC-ND, NBFC-ND-SI & NBFC-D- Existing classiϐications | From October 01, 2022, all references to NBFC-ND shall mean NBFC-BL and all references to NBFC-D and NBFC-NDSI shall mean NBFC-ML or NBFC-UL, as the case may be2. |
| Progressive application of regulations | Regulatory revisions applicable to lower layers of NBFCs will automatically be applicable to NBFCs residing in higher layers, unless stated otherwise. |
| Regulatory guidelines for NBFCs in Base Layer | NBFCs in the Base Layer (NBFC-BL) shall be subject to regulations as currently applicable to NBFC-ND, except for the changes related to NOF and Internal Capital Adequacy Assessment Process (ICAAP). NBFC-P2P, NBFC-AA, and NOFHC shall be subject to extant regulations governing them3 |
| Regulatory guidelines for NBFCs in Middle Layer | NBFCs in the Middle Layer (NBFCML) shall continue to follow regulations as currently applicable for NBFC-ND-SIs, NBFC-Ds, CICs, SPDs and HFCs, as the case may be, except for the changes related to NOF and Internal Capital Adequacy Assessment Process (ICAAP). |
| Regulatory guidelines for NBFCs in Upper Layer | NBFCs lying in the Upper Layer (NBFC-UL) shall be subject to regulations applicable to NBFC-ML in addition to the changes related to NOF and Internal Capital Adequacy Assessment Process (ICAAP). |
4. Regulatory Changes under SBR for all layers of NBFC’s
a) Net Owned Fund – Regulatory minimum Net Owned Fund (NOF) for NBFC-ICC, NBFCMFI and NBFC-Factors shall be increased to ₹10 crore.4 The following glide path is provided for the existing NBFCs to achieve the NOF of ₹10 crore:
| NBFCs | Current NOF | By March 31, 2025 | By March 31, 2027 |
| NBFC-ICC | ₹2 crore | ₹5 crore | ₹10 crore |
| NBFC-MFI | ₹5 crore (₹2 crore in NE Region) | ₹7 crore (₹5 crore in NE Region) | ₹10 crore |
| NBFC-Factors | ₹5 crore | ₹7 crore | ₹10 crore |
However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF shall continue to be ₹2 crore. It is clarified that there is no change in the existing regulatory minimum NOF for NBFCs – IDF, IFC, MGCs, HFC, and SPD.
NPA Classiϐication – The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs. A glide path is provided to NBFCs in Base Layer to adhere to the 90 days NPA norm as under –
| NPA Norms | Timeline |
| >150 days overdue | By March 31, 2024 |
| >120 days overdue | By March 31, 2025 |
| > 90 days | By March 31, 2026 |
Explanation: The glide path will not be applicable to NBFCs which are already required to follow the 90-day NPA norm.
b) Experience of the Board – Considering the need for professional experience in managing the affairs of NBFCs, at least one of the directors shall have relevant experience of having worked in a bank/ NBFC.
c) Ceiling on IPO Funding – There shall be a ceiling of ₹1 crore per borrower for financing subscription to Initial Public Offer (IPO). NBFCs can fix more conservative limits.
5. Regulatory changes for NBFC-ML & NBFC-UL
| Internal Capital Adequacy Assessment Process (ICAAP) | NBFCs are required to make a thorough internal assessment of the need for capital, commensurate with the risks in their business. This internal assessment shall be on similar lines as ICAAP prescribed for commercial banks under Pillar 2 |
| Common Equity Tier 1 | In order to enhance the quality of regulatory capital, NBFC-UL shall maintain Common Equity Tier 1 capital of at least 9 per cent of Risk Weighted Assets. |
| Leverage | In addition to the CRAR, NBFC-UL will also be subjected to leverage requirement. |
| Differential standard asset provisioning | NBFC-UL shall be required to hold differential provisioning towards different classes of standard assets. |
| Concentration of credit/ investment | Single exposure limit of 25% for single borrower/party and 40% for single group of borrowers/ parties. Further, the concentration limits shall be determined with reference to the NBFC’s Tier 1 capital instead of their Owned Fund. |
| Sensitive Sector Exposure (SSE) | Exposure to capital market (direct and indirect) and commercial real estate5 shall be reckoned as sensitive exposure for NBFCs. NBFCs shall fix Board-approved internal limits for SSE separately for capital market and commercial real estate exposures. |
| Regulatory restrictions on loans | Granting loans and advances to directors, their relatives and to entities where directors or their relatives have major shareholding etc. |
| Large Exposure Framework | It has been decided to introduce Large Exposure Framework (LEF) for NBFCs placed in the Upper Layer. |
| Internal Exposure Limits | In addition to the internal limits on SSE in respect of capital market and commercial real estate as indicated in para b) above, Board of NBFC-UL shall also determine internal exposure limits on other important sectors to which credit is extended |
| Qualiϐication of Board Members | Board members shall be competent to manage the affairs of the NBFC. |
| Listing & Disclosures | NBFC-UL shall be mandatorily listed within 3 years of identification as NBFC-UL |
| Removal of Independent Directors | NBFC-UL shall be required to report to the supervisors in case any Independent Director is removed/ resigns before completion of his normal tenure. |
6. Regulatory changes for NBFC-BL
| Risk Management Committee | In order that the Board is able to focus on risk management, NBFCs shall constitute a Risk Management Committee (RMC) either at the Board or executive level. |
| Disclosures | Disclosure requirements shall be expanded, inter alia, to include types of exposure, related party transactions, loans to Directors/ Senior Officers and customer complaints. |
| Loans to directors, senior ofϐicers and relatives of directors | NBFC-BL shall have a Board approved policy on grant of loans to directors, senior officers and relatives of directors and to entities where directors or their relatives have major shareholding. |
| Key Managerial Personnel | Except for directorship in a subsidiary, Key Managerial Personnel6 shall not hold any office (including directorships) in any other NBFC-ML or NBFC-UL. |
| Independent Director | Within the permissible limits in terms of Companies Act, 2013, an independent director shall not be on the Board of more than three NBFCs (NBFC-ML or NBFC-UL) at the same time. |
| Disclosures | NBFCs shall, in addition to the existing regulatory disclosures, disclose the following in their Annual Financial Statements, with effect from March 31, 2023:
-Corporate Governance report containing composition and category of directors, shareholding of non-executive directors, etc. -Disclosure on modified opinion, if any, expressed by auditors, its impact on various financial items and views of management on audit qualifications. -Items of income and expenditure of exceptional nature. -Breaches in terms of covenants in respect of loans availed by the NBFC or debt securities issued by the NBFC including incidence/s of default. -Divergence in asset classification and provisioning above a certain threshold to be decided by the Reserve Bank. |
| Chief Compliance Ofϐicer | In order to ensure an effective compliance culture, it is necessary to have an independent compliance function and a strong compliance risk management framework in NBFCs. NBFCs are, therefore, required to appoint a Chief Compliance Officer (CCO), who should be sufficiently senior in the organization hierarchy. |
| Compensation guidelines | In order to address issues arising out of excessive risk taking caused by misaligned compensation packages, it has been decided that NBFCs shall put in place a Board
approved compensation policy. The guidelines shall at the minimum include, a) constitution of a Remuneration Committee, b) principles for fixed/ variable pay structures, and c) malus/ claw back provisions. |
| Other Governance matters | NBFCs shall comply with the following:
-The Board shall delineate the role of various committees (Audit Committee, Nomination and Remuneration Committee, Risk Management Committee or any other Committee) and lay down a calendar of reviews. -NBFCs shall formulate a whistle blower mechanism for directors and employees to report genuine concerns. -The Board shall ensure good corporate governance practices in the subsidiaries of the NBFC. |
| Core Banking Solution | NBFCs with 10 and more branches are mandated to adopt Core Banking Solution. A glide path of 3 years with effect from October 01, 2022 is being provided. |
7. Other important issues
Classiϐication of Government owned NBFCs – As per the Reserve Bank’s circular on ‘Withdrawal of Exemptions Granted to Government Owned NBFCs’ dated May 31, 2018, the Government owned NBFCs are still in the transition period to attain the minimum CRAR. It has, therefore, been decided not to subject these NBFCs to the Upper Layer regulatory framework at this juncture.
Regulation of NBFCs not availing public funds and not having customer interface – NBFCs not availing public funds and not having customer interface bear a different risk profile and hence deserve a differential regulatory treatment. It has been decided that Reserve Bank will come out with separate regulations for such NBFCs in due course. Till such time, the extant regulations will continue to apply.
Notes:-
1 Public Funds and Customer Interface as defined in Master Direction on Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 dated September 01, 2016
2 It is clarified that existing NBFC-ND-SIs having asset size of ₹500 crore and above but below ₹1000 crore (except those necessarily featuring in Middle Layer) will be known as NBFC-BL.
3 Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017; Master Direction- Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016; and Guidelines for Licensing of New Banks in the Private Sector dated February 22, 2013 and other related guidelines containing instructions on NOFHC.
4 It is clarified that there shall be no distinction in the NOF requirement for NBFCs registered in the North East Region. 5 NOF for different categories are – IDF and IFC – 300 crore, MGC- 100 crore, HFCs- 20 crore, SPDs which undertake only the core activities – 150 crore, SPDs which also undertake non-core activities – 250 crore.
5 Sensitive Sector Exposure as enumerated in para 3.6, Annex XIV of Master Direction on Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 dated September 01, 2016
6 As defined in Section 2 (51) of Companies Act, 2013, as amended from time to time.
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