NBFC Regulations
NBFCs have long been supporting the financial sector by augmenting credit accessibility and financial inclusivity. Their contribution to thriving the corporate and financial landscape is unprecedented and invaluable. Similar to traditional banks, NBFCs offer various services with few exceptions. NBFCs experience myriad compliances when it comes to registration and operation, just like conventional financial institutions. Reserve Bank of India (RBI), the apex regulator, comes up with revised norms occasionally to amplify the transparency and productivity of these entities. The most recent regulatory framework was rolled out on Oct 19, 2023, governing the key aspects of diverse NBFCs. In this article, we will look closely at NBFC regulations and their implications.
Evolution of NBFC Regulations
Historical Context
The RBI has categorized NBFCs into two fundamental classifications viz.
- Systemically important (SI)
- Non-systemically important (non-SI)
The asset size serves as a key factor for classification. As per RBI, NBFCs with an asset size lower than Rs 500 crore are deemed non-SI, whereas those with assets higher than Rs 500 crore are considered SI.
Although this classification seems fair and all-encompassing, it adheres to some downsides in catering to the diverse nature and risk profiles of various NBFCs.
Introduction of the SBR Framework
Recognizing the increasing demand for a refined regulatory framework, the Reserve Bank came up with an SBR Framework in October 2022. This new framework yields a new classification of NBFCs, embracing four layers viz. base, middle, upper, and top, each adhering to distinct regulations. This layered approach effectively spans varied risk levels and operational intricacies tied to diverse NBFCs.
Key Changes and Clarifications
Reclassification Criteria
Under the SBR Framework, NBFCs’ classification has undergone updation. The base layers (BL) entail NBFCs with asset sizes less than Rs 1000 crores, whereas those assets more than Rs. 1000 crores are included in the Middle Layer (ML). This reclassification leads to the creation of a new gray area for NBFCs with asset sizes ranging from Rs 500-1000 crores, reinforcing the requirement for further classification.
The SBR Master Directions:
In a bid to overcome the intricacies and reinforce transparency and inclusivity, the RBI rolled out the new framework viz. “Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (SBR Master Directions)”.
This document cum master direction aims to harmonize the NBFCs’ operation and reinforce transparency as well as clarity by streamlining various norms.
Detailed Breakdown of SBR Master Directions
Regulations for Different Layers
The SBR Master Directions are orchestrated section-wise depending on NBFCs’ size and functions.
- Base Layer (BL): Regulations span NBFCs with assets less than Rs. 1000 crores.
- Middle Layer (ML): Additional regulations spanning NBFCs with assets more than Rs. 1000 crores.
- Upper Layer (UL): Further regulations encompassing NBFCs that adhere to certain criteria beyond the Middle Layer.
- Top Layer (TL): Specific regulations that will come to light whenever the requirements arise.
Specific Directions for Various NBFC Types
Apart from the layer-based norms, the SBR Master Directions pens down specific regulations that apply to different NBFCs, such as:
- NBFC-P2P and NBFC-Account Aggregators
- Housing Finance Companies
- Microfinance Institutions (MFIs)
- Asset Reconstruction Companies
- Mortgage Guarantee Companies
- Infrastructure Debt Funds (IDFs)
- Core Investment Companies
- Residuary Non-Banking Companies
- Deposit-taking NBFCs
- NBFCs registered under the Factoring Act
These specific directions ensure that each NBFC is governed as per its distinct risk traits and operational requirements.
Continuation of Existing NBFC Regulations
Key NBFC Regulations Retained
While the SBR Master Directions consolidate various norms, certain NBFC regulations have been retained for those with an asset size of more than Rs 500 crores. These include:
Refinancing of Project Loans: This applies to non-deposit-taking NBFCs having an asset size of less than Rs. 500 crores.
Early Recognition of Stress and CRILC Reporting: Applies to NBFC-Factors, deposit-taking NBFCs, and non-deposit-taking NBFCs having an asset size amounting to Rs. 500 crores and above.
Identification of Non-Cooperative Borrowers: Mandatory for NBFC-Factors, deposit-taking NBFCs, and non-deposit-taking NBFCs having an asset size of Rs. 500 crores and above.
Prudential Framework for Resolution of Stressed Assets (June 7, 2019): Applies to deposit-taking NBFCs and non-deposit-taking NBFCs adhering to an asset size amounting to Rs. 500 crores and above.
Framework for Revitalizing Distressed Assets: Applies to non-deposit-taking NBFCs having an asset size of less than Rs. 500 crores.
Unconsolidated NBFC Regulations
Regardless of the all-encompassing nature of the SBR Master Directions, some NBFC regulations under the SBR Framework await consideration and consolidation. These include:
- Fraud Reporting Guidelines
- Implementation of ‘Core Financial Services Solution’ by NBFCs
- Compliance Function and Role of Chief Compliance Officer (CCO)
- Master Directions on Information Technology Framework
These regulations have been rolled by regulators viz. the Department of Supervision (DoS) or the Department of Non-Banking Supervision (DNBS). They continue to exist and are yet to be listed in the SBR Master Directions’ repeal section.
Conclusion
For years, the number of NBFC regulations has remained a matter of debate among financial institutions, especially private lenders. Their impact has significantly influenced the working of diverse NBFCs, resulting in lower productivity and intense compliance.
The advent of SBR Master Directions boasting new NBFC regulations seems to be a big leap in the NBFC realm as they aim to consolidate various norms and reinforce transparency. Their all-encompassing nature ensures better control and instills a robust regulatory framework.
Read Our Article: How To Get NBFC License In India?
