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On October 22, 2021, the Reserve Bank of India announced a scale based revised regulatory framework for NBFCs with a view to have a tight oversight of the sector. As per the scale based regulatory framework for Non-Banking Financial Companies, there will be more categories of NBFCs as per their activity with stringent rules. The framework encompasses various facets of NBFC regulation covering capital requirements, prudential regulation, governance standards etc.
The RBI[1], in a notification, observed that the contribution of NBFCs in supporting economic activity and its role as a supplemental channel of credit intermediation with banks is well recognised. The RBI further mentioned that the sector has undergone remarkable evolution over the years in terms of size, complexity and interconnectedness. The RBI observed that various entities have grown and become significant, and therefore there was a need to align regulatory framework for NBFCs considering their changing risk profile.
The regulatory structure of the NBFCs will include 4 layers as per their size, activity and perceived riskiness.
Regulatory changes will be as follows:
Regulatory changes applicable to NBFC-ML and UL
Additional Regulatory Changes to NBFC-UL
The revised norms are specified in the table:
Existing Limit
As a % of Owned Fund
Revised Limit
As a % of Tier I Capital
Lending
Investment
Total
Exposure
Single borrower/party
15
25
Single group of borrowers/parties
40
Changes applicable to NBFC-BL
Changes applicable to NBFC-ML and NBFC-UL
Additional Changes applicable to NBFC-UL
Those NBFCs that come under NBFC top layer shall be subject to high capital charge. There would be enhanced as well as intensive supervisory engagement with these NBFCs.
These guidelines will be effective from 1st October 2022. Further, the instructions related to ceiling on IPO funding shall come into effect from 1st April 2022.
Read our article:Regulatory Framework for NBFCs: A RBI Revision
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