RBI Announces Scale-based Regulatory Framework for NBFCs

The Reserve Bank of India (RBI), the central bank of India has recently initiated a revised scale-based regulatory framework for the Non-Banking Financial Companies (NBFCs). The scale-based framework includes multiple segments of regulation regarding the NBFCs, that will cover capital requirements, governance standards, prudential regulation, etc. The framework is going to be effective from 1 October, next year.

The 'Revised Regulatory Framework for NBFCs - A Scale-based Approach' was earlier issued for public comments on January 22, 2021. Based on the inputs received, it has now been decided to put in place a revised regulatory framework for NBFCs (Annex).

The RBI stated, "The contribution of NBFCs towards supporting real economic activity and their role as a supplemental channel of credit intermediation alongside banks is well recognized. Over the years, the sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector. Many entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile."

The regulatory structure for NBFCs will have 4 layers. The NBFCs in the last layer will be identified as NBFC - Base Layer (NBFC-BL), the middle and highest layers will be known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively. These layers will be structured based on their size, activity, and perceived riskiness. Additionally, there will cap of Rs. 1 crore per borrower for financing subscription to Initial Public Offer (IPO).