NBFCs will be subject to scale-based rules from October 1, 2022
NBFCs of various sizes are subject to varied regulatory parameters under scale-based rules
The Reserve Bank of India said on October 22 that non-banking financing companies (NBFCs) will be subject to scale-based regulation (SBR) from October 1, 2022.
The SBR framework, according to the RBI, covers several aspects of NBFC regulation, including capital requirements, governance norms, prudential regulation, and so on.
The central bank stated that it has been determined to initially release an integrated regulatory framework for NBFCs under SBR, which will provide a holistic perspective of the SBR structure, the set of new laws being adopted, and their respective deadlines.
The regulatory structure for NBFCs will be divided into four layers based on their size, activity, and perceived riskiness under the scale-based laws.
NBFCs with assets of up to Rs 1000 crore, including NBFCs P2P and NBFC Account Aggregators, are included in the base layer.
The middle layer includes housing finance businesses, core investment companies, and infrastructure finance companies, as well as NBFCs with assets above Rs 1,000 crore.
RBI will identify higher layer NBFCs that require more stringent regulatory oversight based on a set of criteria and scoring methodology. Regardless of other factors, the top 10 qualified NBFCs in terms of asset size will always be in the upper stratum, according to RBI.
The top layer is now empty; however, if the RBI believes there is a significant increase in the potential systemic risk posed by certain NBFCs in the upper layer, this layer may be populated, according to RBI. These NBFCs will then be moved to the top layer.
The RBI has also set a limit of Rs 1 crore per borrower for financing IPO subscriptions, however NBFCs can set more cautious limitations.
In addition, the central bank has issued guidance on the requirement for net owned funds. The net owned fund for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no client interface remains at Rs 2 crore.
However, the criteria for NBFCs, such as Investment and Credit Companies (NBFC-ICC), Micro Finance Institutions (NBFC-MFI), NBFC-Factors, and Mortgage Guarantee Companies (NBFC-MGC), has been upped to Rs 10 crore, with a glide path to meet it.
NBFC ICC will need to raise Rs 5 crore in net owned funds by March 31, 2025, and Rs 10 crore by March 20, 2027. Except in the north east, NBFC MFIs must reach Rs 7 crore by March 31, 2025, and Rs 10 crore by March 31, 2027, and NBFC Factors must follow the same glide path.
