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The governing body for all Non-Banking Financial companies in India is the (RBI) Reserve Bank of India. The Scale Based Regulation (SBR), which takes effect on October 22, 2021, was introduced by the RBI to help current NBFCs’ regulatory frameworks keep up with their shifting risk profiles. Before implementing the Scale Based Regulation Framework, NBFCs were categorised as Systemically Important (SI) or Non-Systemically Important (NSI) based on the total risk associated with their operations and the significance of those operations from an economic perspective. NBFCs are governed by Master Direction. If their asset size is up to Rs. 500 crores, they are classified as NSI, and those with 500 crores or more, are categorised as SI, depending on their asset size.
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The size, activity, and perceived riskiness of NBFCs will determine the regulatory structure in the four layers of NBFC. NBFCs in the lowest layer are referred to as NBFC-Base Layer (NBFC-BL). The terms “NBFC – Middle Layer and upper Layer shall be known as NBFC – Middle Layer (NBFC-ML) and NBFC-upper layer (NBFC-UL), respectively. The Top Layer, often called NBFC – Top Layer, is ideally anticipated to remain empty (NBFC-TL).
Non-deposit taking NBFCs with assets under ₹1000 crore
The following NBFCs will always be in the Base Layer of the Regulation Structure when engaging in these activities:
First and foremost, it’s essential to realise that the categorisation and Layer that the NBFC belongs to will influence the rules, regulations, and compliances that will apply to it. In comparison to an NBFC-NSI (Non-Systematically Important), an NBFC-SI (Systematically Important) has been subject to stricter restrictions (such as the need for board committees, concentration norms, etc.).
Because of this, if it is stated that the subject entities must comply with or continue complying with SI Directions, then such entities must continue with strict compliance. In contrast, other entities in the same Layer (BL entities) would continue with lax norms under NSI Directions. However, if it is claimed that such subject entities are now BL and may obey NSI Directions, those companies would be released from various compliances.
We must first examine the purpose of the SBR Framework in order to respond to the problem statement. The following was stated in the Announcement on Developmental and Regulatory Policies dated December 4, 2020, “The regulatory framework controlling the NBFC sector is based on the notion of proportionality, allowing for the sector to access sufficient operational flexibility through calibrated regulatory measures. Let us examine whether the base layer amenable to Non-systematically Important or Systematically important NBFCs.
The same regulations presently apply to NBFC-ND and will continue to apply to NBFC-BL. But, as the threshold is being raised to ₹1000 crore, improved governance and disclosure rules might be added to the legal framework. The exact regulatory adjustments will be regarding the SBR Framework released by the RBI. The aforementioned announcement makes many references to “NBFC-ND” in contrast to NBFC-ND-SI but does not define the term.
As of October 1, 2022, NBFC-D shall mean Non-Banking Financial Companies-Base Layer, and all references to NBFC-D and NBFC-ND-SI shall mean NBFC-ML or NBFC-UL, as applicable. It is clear that current NBFC-ND-SIs will be referred to as NBFC-BL if their asset size is $500 million or more but less than ₹1000 crore (except for those who must necessarily be included in the Middle Layer). It is abundantly clear that references to NBFC-ND-SI only pertain to NBFC-ML and NBFC-UL (where applicable) and that NBFC-ND only refers to NBFC-ND-NSI.
“Regulation by proportion” is the goal of the SBR Framework. Consequently, it is impossible to argue that the regulatory goal was to create a sub-classification within the BL despite the existence of numerous levels in the form of BL, ML, UL, and TL. Such a reading would be illogical because it would make no sense to have a Middle layer and then apply SI Directions to things that lie under that Layer as well as to a specific area of the Base layer.
All of the NBFCs in the Base Layer (including the subject entities with asset sizes greater than Rs. 500 crores but less than Rs. 1000 crores) shall be subject to compliance with the NBFC-ND-NSI Directions, as established by the provisions of the SBR Framework. The systemic classification that existed before the object became a base layer may be all that is being referenced by the RBI List (as indicated above). The SBR framework does not mention requiring a subject entity to keep up with NBFC-SI rules. The subject entity can switch to NBFC-NSI regulations as a result.
Also Read:Decoding the Growth of NBFCs in IndiaEmerging Prospects for NBFCs in the Indian Financial Landscape in 2023
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