RBI proposes four-layered regulatory structure for NBFCs

25 Jan 2021 Evaluate

The Reserve Bank of India (RBI) in its discussion paper on ‘Revised Regulatory Framework for NBFCs - A Scale-Based Approach’ has proposed a four-layered regulatory structure for non-banking financial companies (NBFCs) with progressive increase in intensity of regulation. As per the paper from RBI, the NBFCs will be split into four layers -- base, middle, upper and top. The classification of the NBFCs will be based on host of parameters including size, leverage, interconnectedness, substitutability, complexity and nature of activity, among others.

Over the years, the NBFC sector has undergone considerable evolution. Higher risk appetite of NBFCs has contributed to their size, complexity and interconnectedness, making some of the entities systemically significant, posing potential threat to financial stability. While NBFCs are under RBI's regulation since 1964, the central bank introduced a comprehensive regulatory framework for the systemically important NBFCs in 2006, which was further refined in 2014. Since then, the RBI has been carrying out calibrated modifications to mould the regulations to the changing environment. Accordingly, within the universe of systemically important NBFCs, an additional identifier has been placed at Rs 5,000 crore, wherein, additional regulations have been made applicable to such large NBFCs.

The RBI said ‘Unbridled growth aided by less rigorous regulatory framework within an interconnected financial system can sow the seeds of systemic risk. Failure of any large and deeply interconnected NBFC is capable of transmitting shocks in to the entire financial sector and cause disruption even to the operations of the small and mid-sized NBFCs’. The current threshold for systemic importance is Rs 500 crore. This threshold needs recalibration, taking into account increase in general price levels as well as increase in real GDP since 2014, the paper said. It proposes to raise this threshold to Rs 1,000 crore. The middle layer will consist of all non-deposit taking NBFCs classified currently as NBFC-ND-SI (systematically important non-deposit taking company) and all deposit taking NBFCs. The upper layer would comprise only those NBFCs which are specifically identified as systemically significant, based on a set of parameters.

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RBI proposes four-layered regulatory structure for NBFCs

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