{"id":29068,"date":"2021-04-16T12:47:32","date_gmt":"2021-04-16T07:17:32","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=29068"},"modified":"2025-01-14T18:39:54","modified_gmt":"2025-01-14T13:09:54","slug":"rbi-proposed-to-revamp-nbfcs-regulatory-framework","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/","title":{"rendered":"RBI Proposed to Revamp NBFCs Regulatory Framework"},"content":{"rendered":"\n<p class=\"has-drop-cap\">With some NBFCs\nwitnessing systematic upscaling over the years due to their network, size, and\ncomplexity, the Reserve bank of India has sought to examine their regulatory\nframework via a scale-based approach.<\/p>\n\n\n\n<p>On Jan 22, 2021, RBI came up with a discussion paper related to the regulatory framework for <a href=\"https:\/\/corpbiz.io\/nbfc-registration\"><strong>NBFCs<\/strong><\/a> that emphasize the bucketing of NBFCs into four layers. These are as follows:-<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter is-resized\"><img decoding=\"async\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/RBI-Proposed-to-Revamp-NBFCs-Regulatory-Framework.png\" alt=\"RBI Proposed to Revamp NBFCs Regulatory Framework\" class=\"wp-image-29071\" width=\"472\" height=\"426\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/RBI-Proposed-to-Revamp-NBFCs-Regulatory-Framework.png 1000w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/RBI-Proposed-to-Revamp-NBFCs-Regulatory-Framework-300x271.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/RBI-Proposed-to-Revamp-NBFCs-Regulatory-Framework-768x694.png 768w\" sizes=\"(max-width: 472px) 100vw, 472px\" \/><\/figure><\/div>\n\n\n<p>Corresponding to each layer, <a href=\"https:\/\/corpbiz.io\/rbi\">RBI <\/a>has set out regulations around concentration norms, capital requirement, governance &amp; disclosures in the discussion paper. The section below will render a brief insight into the proposed regulatory framework.<\/p>\n\n\n\n<ul>\n<li><strong><em>The Base Layer<\/em><\/strong> would cover 97% of NBFCs &amp; encompass NBFCs having asset sizes of less than INR 1000 cr., P2P lenders, NOFHCs, account aggregators, &amp; Type 1 NBFCs.<\/li>\n\n\n\n<li><strong><em>The Middle Layer<\/em><\/strong> would encompass NBFCs having asset size greater than INR 1,000 cr. NBFC-D, HFC, IDF, IFCs, SPDs, &amp; CICs.<\/li>\n\n\n\n<li><strong><em>The Upper layer<\/em><\/strong> would encompass the top 10 NBFCs as per asset size &amp; other entities shortlisted on the basis of size, leverage, assets\/liabilities within the financial system, &amp; group structure.<\/li>\n\n\n\n<li><strong><em>The Top Layer<\/em><\/strong> as per Reserve Bank will remain empty. The layer would be populated only if Reserve Bank suspects systemic risk spill-over from specific NBFCs in the Upper Layer have encountered an unexpected increase. Such entities would be routed to the Top Layer from the Upper Layer. Such NBFCs would be subject to higher      capital charge, including Capital Conservation Buffers<\/li>\n<\/ul>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/procedure-of-nbfc-registration-in-india\/\">NBFC Registration \u2013 Know the Entire Incorporation Procedure<\/a><\/mark><\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/#How_RBI_Proposed_the_Bucketing_of_NBFCs\" >How RBI Proposed the Bucketing of NBFCs?&nbsp;&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/#What_are_the_Proposed_Changes_in_Regulatory_Framework_NBFCs_under_Each_of_the_Layers\" >What are the Proposed Changes in Regulatory Framework\nNBFCs under Each of the Layers?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/#Do_NBFCs_ML_Encounter_Rise_in_Capital_Requirements\" >Do NBFCs (ML) Encounter Rise in Capital Requirements?&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/#Considerable_Changes_in_Regulatory_Framework_Proposed_by_Reserve_Bank_for_NBFC-MLs\" >Considerable Changes in Regulatory Framework Proposed\nby Reserve Bank for NBFC-MLs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/#Overview_on_RBI-proposed_Regulatory_Framework_for_NBFCs_UL\" >Overview on RBI-proposed Regulatory Framework\nfor NBFCs (UL)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/#_Conclusion\" >&nbsp;Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_RBI_Proposed_the_Bucketing_of_NBFCs\"><\/span>How RBI Proposed the Bucketing of NBFCs?&nbsp;&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>According to the Reserve Bank paper, the nature of the activity will play a key role in determining the base &amp; middle layer NBFCs. Therefore, NBFC-BL will comprise of NBFCs tagged as NBFCs (NBFC-ND), also Type I NBFCs (that lack access to customer interface or public funds), NOFHC (Non-Operative Financial Holding Company), NBFC <a href=\"https:\/\/corpbiz.io\/peer-to-peer-lending-license\">P2P (Peer to Peer)<\/a>, and <a href=\"https:\/\/corpbiz.io\/nbfc-account-aggregator-license\">NBFC-AA (Account Aggregator)<\/a>.<\/p>\n\n\n\n<p>Given that these\nentities are less likely to encounter any systemic risk related to their\nactivities, they can rejoice less-stringent regulation, as per Reserve Bank.<\/p>\n\n\n\n<p>The Middle Layer\n(NBFC-ML) shall entail all non-deposit-taking NBFCs, presently classified as\nNBFC-ND-SI, and all deposit-taking NBFCs. NBFCs that are already included on\nthe upper layer shall not be a part of this layer.&nbsp;<\/p>\n\n\n\n<p>Moreover, SPDs\n(standalone primary dealers), NBFC-HFCs, infrastructure finance companies, core\ninvestment companies, and infrastructure debt funds (IDFs), regardless of their\nasset size, shall be a part of this bucket.&nbsp; The upper layer&#8217;s\ndetermination, i.e., top 50 NBFCs, will be done based on the different\nparameters as given below.&nbsp;<\/p>\n\n\n\n<ul>\n<li>Size\n(35%)<\/li>\n\n\n\n<li>Inter-connectedness\n(25%)<\/li>\n\n\n\n<li>Supervisory\ninputs (30%)<\/li>\n\n\n\n<li>Complexity\n(10%)<\/li>\n\n\n\n<li>Supervisory\ninputs (30 %) \u2013 including group structure, type of liabilities, and segment\npenetration<\/li>\n<\/ul>\n\n\n\n<div class=\"shadow1\"><strong>Note:<\/strong> % manifest the degree of relevancy) As per Reserve Bank, the top 10 NBFCs in India shall be treated as a part of this category.<\/div>\n\n\n\n<p>For now, the top layer\nshall stay empty. However, Reserve Bank can push certain NBFCs to the top layer\nif some upper layer NBFCs encounters any systemic risk in this context.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Proposed_Changes_in_Regulatory_Framework_NBFCs_under_Each_of_the_Layers\"><\/span>What are the Proposed Changes in Regulatory Framework\nNBFCs under Each of the Layers?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The proposed regulatory\nchanges revolve around governance\/disclosure norms, capital, and concentration\nnorms. There are no drastic changes in NBFCs (BL) regulations except in the\narea of NPA classification. The asset size limit has been set at INR 1,000\ncrore, which was previously capped at INR 500 crore, routing more NBFCs to the\nbase layer. Further, RBI proposed to tighten up entry norms by increasing mini.net\nowned funds criteria to INR 20 crore from INR 2 crore.<\/p>\n\n\n\n<p>RBI has proposed some\ngovernance alterations for the base layer, but more considerable changes have\nbeen projected for NBFCs falling in the upper &amp; middle layer.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Do_NBFCs_ML_Encounter_Rise_in_Capital_Requirements\"><\/span>Do NBFCs (ML) Encounter Rise in Capital Requirements?&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As of now, no such\nrequirement has come under the light. Most of the changes are confined to\nconcentration and governance norms. Presently, NBFCs were obligated to maintain\na mini Capital to Risk Assets Ratio (aka CRAR) of 15% with mini. Tier I of 10%.\nMiddle layer NBFCs will remain isolated from such a change.&nbsp;<\/p>\n\n\n\n<p>Presently, concentration\nnorms for NBFCs are set out independently for lending &amp; investment\nexposures (15% for each borrower &amp; 25% for a group of borrowers. This is\nestimated as the net owned funds&#8217; percentage. For middle layer NBFCs, the\nReserve Bank has envisaged merging the investment &amp; lending thresholds into\na single exposure limit of 25% &amp; group exposure of 40%, estimate as a\npercent to Tier 1 capital (rather than a net owned funds).<\/p>\n\n\n\n<p>Compared to banks where\nsingle and group exposure limits at set at 20% and 25%, respectively, these\nlimits seem relaxed for NBFCs (ML).&nbsp;Given that NBFCs ND-SI already follows\na ninety days NPA (Non-performing Asset) classification form, the impact on\nNBFCs (ML) remains next to negligible.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Considerable_Changes_in_Regulatory_Framework_Proposed_by_Reserve_Bank_for_NBFC-MLs\"><\/span>Considerable Changes in Regulatory Framework Proposed\nby Reserve Bank for NBFC-MLs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While the Reserve Bank\nhas acknowledged the relevancy of rendering ample flexibility in operations\n&amp; not setting out stringent sector-specific exposure limits, it has a\ndrastic impact on IPO financing by proposing an INR 1 crore per NBFC ceiling.\nIt has also set out specific limitations on lending- buy-back of shares, credit\nto directors\/their relatives, etc.<\/p>\n\n\n\n<p>From the governance\nstandpoint, RBI has proposed the remuneration committee&#8217;s constitution,\nadditional disclosures for NBFCs (ML), and rotation of statutory\nauditors.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Overview_on_RBI-proposed_Regulatory_Framework_for_NBFCs_UL\"><\/span>Overview on RBI-proposed Regulatory Framework\nfor NBFCs (UL)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per RBI, the\nregulations for NBFCs (UL) will stay in line with that of banks. Given the operation\nscalability &amp; the systemic significance, the Reserve Bank envisages\ntightening the norms for the top 25-30 NBFCs.<\/p>\n\n\n\n<p>For example, banks\npoised under the Basel III framework were obligated to maintain a mini. Common\nEquity Tier 1 (CET 1) capital capped at 7.375 percent, including capital\nconservation buffer. The Reserve Bank has proposed to set out CET 1 for upper\nlimit NBFCs, at 9%.&nbsp;<\/p>\n\n\n\n<p>Likewise, NBFCs poised under the upper layer should ensure conformity with the leverage requirement.&nbsp;Following is the mathematical expression for formulating leverage ratio under Basel III.&nbsp;<\/p>\n\n\n\n<p><strong><em>Leverage ratio = Tier I\ncapital\/bank&#8217;s exposures.<\/em><\/strong><\/p>\n\n\n\n<p>Therefore, the Leverage\nratio is inversely proportional to the bank&#8217;s exposures- any increment in\nexposure&#8217;s value shall reduce the leverage ratio.&nbsp;<\/p>\n\n\n\n<ul>\n<li>The\nReserve Bank has set out a mini. 3.5% of leverage ratio for banks &amp; 4% for\nD-SIBS, aka Domestic Systemically Important Banks, and proposes an apt ceiling\nto be set out for NBFC-ULs as well.<\/li>\n\n\n\n<li>The\ntop-rated NBFCs shall also shift toward differentiated standard provisioning\nnorms (against the fixed 0.4 percent) as that of banks. Therefore, NBFCs having\nsignificant exposure to commercial real estate might have to maintain higher\nprovisioning than earlier.<\/li>\n\n\n\n<li>On\nthe concentration norms front, the Reserve Bank has proposed merging investment\n&amp; lending limits just like mid-layer NBFCs, but close to the prevailing\nbanks&#8217; thresholds with specific alterations.<\/li>\n\n\n\n<li>Apart\nfrom stiffer governance and disclosure norms, the Reserve Bank also envisages\ncompulsory listing of NBFC-UL.&nbsp;<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"_Conclusion\"><\/span>&nbsp;Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In light of the above facts, it seems that RBI&#8217;s proposal for a tighter regulatory framework for NBFCs across this country may strengthen the balance sheet. With proper categorization in place, <em><strong>RBI<\/strong><\/em><sup><a href=\"https:\/\/www.rbi.org.in\/\"><em><strong>[1]<\/strong><\/em><\/a><\/sup> can ensure proper monitoring of all NBFCs and keeps the unfair regulatory treatment at bay. The four-tier structure will ensure the appropriate inculcation of compliances.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/step-by-step-nbfc-registration-procedure\/\">NBFC Registration: Step by Step Procedure<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>With some NBFCs witnessing systematic upscaling over the years due to their network, size, and complexity, the Reserve bank of India has sought to examine their regulatory framework via a scale-based approach. On Jan 22, 2021, RBI came up with a discussion paper related to the regulatory framework for NBFCs that emphasize the bucketing of [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":29072,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[91],"tags":[1671],"acf":{"service_id":"8"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":3378,"readingTime":5,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29068"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=29068"}],"version-history":[{"count":9,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29068\/revisions"}],"predecessor-version":[{"id":68315,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29068\/revisions\/68315"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/29072"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=29068"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=29068"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=29068"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}