Scale-based regulations (SBR) for non-banking finance institutions (NBFCs) will come into effect starting next year from October 1, announced the Reserve Bank of India on Friday, October 22.
As per the announcement made by the RBI, the new SBR framework will take under its wing different aspects of regulations for NBFCs, covering characteristics such as capital requirements, governance standards and prudential regulations, among others.
The Central Bank has also determined to first introduce an integrated regulatory framework for the NBFCs under the SBR to provide an overview of the SBR structure, new regulations issued under the SBR and their respective timeline to make the new regulatory framework simpler to understand.
As part of the scale-based regulations, the new regulatory framework will comprise a four-tier hierarchy for the NBFCs on the basis of their size, operation and rate of perceived risk calculated by the RBI.
The base tier is for those NBFCs whose asset size amounts up to Rs. 1000 crores. This will also apply to NBFCs peer to peer (P2P) and NBFC Account Aggregators (NBFC AA). The middle tier will comprise those NBFCs whose size of assets surpass Rs. 1000 crores. This tier will also include housing finance companies, core investment companies and infrastructure finance companies.
The upper tier of NBFCs will be identified by the RBI as requiring an enhanced regulatory framework depending upon a set of variables and scoring methodology. The RBI also set in place a mandate that will require the top ten eligible NBFCs in terms of asset size to be placed in this tier.
The top tier will remain empty for the time being, RBI stated but can be filled up if the Central Bank deems that an NBFC belonging to the upper tier is showcasing a considerable increase in its potential systemic risk. Moreover, the RBI has also mandated an upper limit of Rs.1 crore per borrower for financing subscriptions to IPOs but gave NBFCs the flexibility to set more conservative limits.
The Central Bank has also notified the requirements of net-owned funds for NBFCs. The net-owned funds for NBFC-P2P, NBFC-AA and NBFCs with no public funds and customer interface will remain Rs.2 crore. Meanwhile, the net-owned fund’s requirement has been raised for NBFC-ICC, NBFC-MFI and NBFC-Factors and Mortgage Guarantee Companies to Rs.10 crores.