RBI to introduce scale-based regulation for non-banking finance companies

RBI to introduce scale-based regulation for non-banking finance companies

The Rs 54 lakh crore NBFC non-banking finance companies universe that saw the debacle of IL&FS, Dewan Housing and most recently two SREI Group companies, will now have a scale-based regulation. This means the level of regulation will be a function of the size, activity, and risk in the business.

Currently, there are close to 10,000 NBFCs spread across the country. The entire NBFC sector is about 25 per cent of the assets of the banking industry. The RBI's new supervisory framework is the result of the failure of a few large NBFCs.

The sector poses a big threat to the stability of the financial system it has strong links with banks, debt and equity market, insurance and the mutual fund industry. In fact, some NBFCs like Bajaj Finance and Mahindra Finance are as big as any mid-sized bank in the country.

According to RBI's new guidelines, the regulatory structure will have four layers based on their size, activity, and perceived riskiness. NBFCs, in the lowest layer, will be known as NBFC-Base Layer. NBFCs in the middle layer and the upper layer will be known as NBFC-Middle Layer and NBFC-Upper Layer, respectively. The Top Layer is ideally expected to be empty and will be known as NBFC-Top Layer.

The new-age NBFCs, especially the P2 P and accounts aggregator, will come under the Base Layer. The Base Layer will have non-deposit taking NBFCs below the asset size of Rs 1,000 crore and NBFCs undertaking activities like peer-to-peer lending, account aggregator and non-operative financial holding company, and NBFCs not availing public funds and not having any customer interface.

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It is proposed to mostly continue with the 'light touch regulation' and focus is not to burden such entities with a higher level of prudential regulations, but increase transparency by way of greater disclosures and improved governance standards, M Rajeshwar Rao, Deputy Governor, Reserve Bank of India, said at the CII NBFC Summit today.

The middle layer has important NBFCs like deposit-taking and also housing and infrastructure financing companies. According to RBI, the middle layer will consist of all deposit-taking NBFCs, irrespective of asset size, non-deposit taking NBFCs with asset size of Rs 1,000 crore and above, and NBFCs undertaking activities like primary dealership, infrastructure debt funds, core investment companies, housing finance companies and infrastructure finance companies.

In the middle layer, we had proposed to plug the areas of arbitrage between banks and NBFCs where it is felt continuance of the arbitrage would contribute to orderly growth in the sector and would be detrimental to marginal risk to the financial system, said Rao.

The Upper Layer will have NBFCs specifically identified by RBI as warranting enhanced regulatory requirements based on a set of parameters and scoring methodology.

The top 10 eligible NBFCs in terms of their asset size will always reside in the Upper Layer, irrespective of any other factor, said the RBI.

The NBFCs in this layer would be identified by the way of a scoring methodology based on size, interconnectedness, complexity, and supervisory inputs. The idea is to introduce prudential regulations and intensive supervision for such entities proportionate to their systemic significance. Further, to enhance transparency and disclosure, it is also proposed that NBFCs would have to mandate list in a stock exchange within a given time frame, said Rao.

The top layer will ideally remain empty. This layer can get populated if the RBI is of the opinion that there is a potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs will move to the Upper Layer from the Top Layer. Such entities in Top Layer would be required to comply with significantly higher and bespoke regulatory and supervisory requirements, said Rao.