RBI Circular on Multiple NBFCs in a Group: Classification in Middle Layer

Ankit Mishra

28 May, 2024

The Apex Bank, from time to time, has issued various guidelines and notifications to regulate various functions and operations of Non-Banking Financial Companies (NBFCs). The apex bank through Circular No. RBI/2022-23/129 DOR.CRE.REC.No.78/03.10.001/2022-23 dated October 11 2022, has issued a clarification that the NBFCs as part of a group or floated by joint promoters shall not be perceived on a stand-alone basis for their placement as mentioned under the Scale Based Regulations framework notified by the RBI. The placement of NBFCs in a group shall be done based on the total assets held by the Group. If the consolidated asset size is more than 1000 crores, then the NBFCs collectively can be placed in the middle layer. This piece of writing aims to decode the latest RBI circular on multiple NBFCs in a group.

What are Non-Banking Financial Companies?

To better understand the latest RBI Circular, it is important to understand the definition of NBFCs. Non-Banking Financial Companies are entities registered under the Companies Act 1956^[1] and are engaged in providing loans and advances, acquisition of debentures/shares/stocks/securities issued by any Local Authority or Government or any other marketable securities. Any Non-banking company whose principal business is receiving deposits in a lump sum or installments is also termed an NBFC (Residuary Non-Banking Company). The determination that a company is an NBFC or is eligible to take registration from the Reserve Bank of India is conducted through the popular 50-50 test. As per the RBI, only companies conducting Financial activity as Principal business are eligible to take registration as a Non-Banking entity and regularised by the apex bank. The operational structure of Banks and NBFCs is quite similar; however, they possess differences in the following points;

• NBFCs cannot accept demand deposits; NBFCs cannot accept Demand Deposits
• NBFCs are not part of the payment and settlement system and do not have the power to issue cheques.
• Deposit Insurance and Credit Guarantee Corporation provide insurance to the Banks, which is not available to NBFCs.

Also Read: Apply NBFC License with RBI

Definition of a Group

This latest RBI Circular emphasizes the point of having multiple NBFCs in a group which makes it important to understand the meaning and implications of a Group. Reserve bank of India, through its Notification no. DNBS.(PD) 219/CGM (US)-2011 dated January 05, 2011, has defined the scope of a group of companies which includes the entities in any of the following arrangements;

1. Subsidiary Company- Parent Company (AS 21)
2. Joint venture (AS 27)
3. Associate Companies (AS23)
4. Promoter- Promotee as per SEBI (Acquisitions of shares and takeover)Regulations 1997 For Listed companies
5. A related party (AS 18)
6. Common Brand name and equity shares of 20% and above.

The NBFCs falling in the above-mentioned pointers are considered in a group, and their assets can be consolidated for further classification according to the Scale Based Regulation. The consolidated assets can be put forth to put the grouped entity into the middle layer.

Classification Mechanism for NBFCs

According to the Circular on Scale-Based Regulations for NBFCs issued on October 22 2021, by the apex bank, the regulatory structure for the NBFCs shall comprise layers based on various parameters such as activity, size, and perceived riskiness. The NBFCs shall be segregated into the following groups:

• NBFC- Base Layer (NBFC-BL): the base layer shall consist of non-deposit-taking NBFCs below the asset size of 1000 crores and carrying out the following activities;
  • NBFC-Peer to Peer Lending Platform (NBFC-P2P),
  • NBFC-Account Aggregator (NBFC-AA),
  • (Non-Operative Financial Holding Company (NOFHC) and
  • NBFCs not availing public funds and not having any customer interface

• NBFC- Middle Layer (NBFC-ML): The Middle layer consists of all the deposit-taking NBFCs Irrespective of the asset size, the non-deposit-taking NBFCs with an asset size of more than 1000 crores and carrying out the following activities
  • Standalone Primary Dealers (SPDs),
  • Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs),
  • Core Investment Companies (CICs),
  • Housing Finance Companies (HFCs) and
  • Infrastructure Finance Companies (NBFC-IFCs).

• NBFC- Upper Layer (NBFC-UL): the NBFCs in the upper layer will be notified by the RBI from time to time, consisting of NBFCs have been identified the by the apex banks. The NBFCs in this list will be adjudged based on parameters and their advanced regulatory framework and marked in points. In the latest press release dated 30^th September 2022, the Reserve Bank of India notified the names of 16 NBFCs in the Upper Layer, including giants like LIC Housing Finance Limited, Tata Sons Private Limited, L&T Finance Limited etc. It was also clarified that HDFC finance was not included in the list due to the ongoing merger deal.
• NBFC- Top Layer (NBFC-TL): The NBFC Top layer will remain empty, in case systematic risks from NBFCs in the upper layer are increased, they will be transferred to the Top Layer. 

Multiple NBFCs in a Group and their classification in Middle Layer

1. This RBI circular on the topic of multiple NBFCs in a group will be effective from 1st October 2022 is aimed at providing clarity on the placement of NBFCs that are part of a single group in the Scale Based Regulations. This classification aims to make the segregation of Group NBFCs easier.
2. Para 16 of the Master Direction – Non-Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions 2016 states that all the eligible NBFCs that are a part of the common Group or have the same promoters shall not be viewed on a stand-alone basis, which means that the total assets of the Group shall be consolidated to ascertain their position according to the Scale Based Regulations put forth in October 2021.
3. If the consolidated asset size of the Group is ₹1000 crore or more. In that case, each NBFC-ICC (Investment and Credit Company), NBFC-MFI (Micro Finance Institution), and NBFC-MGC (Mortgage Guarantee Corporation) lying in the Group will be classified as an NBFC in the middle layer, and the entity has to follow all the compliance requirements of a middle layer NBFC as prescribed by the RBI from time to time. It is pertinent to mention here that in such cases, the individual asset size will not matter whilst classifying it in the Scale Based Regulations; for example, if an NBFC-ICC in a group has an asset size of 20 Crores, but the Group’s overall asset Size is more than 1000 crore, the said NBFC-ICC will be placed in the middle layer irrespective of its individual asset size.
4. Further, the RBI circular has clarified that if the Group consists of any NBFC P2P (Peer to Peer Lending), NBFC AA (Account Aggregator) or Non-Operative Financial Holding Company and NBFC without public funds and customer interface, these entities will remain in the Base Layer without any change in their structure and compliance. Further, the circular also emphasized the certification assets of the Group on March 31 of all the group NBFCs every year by the statutory auditors. The same shall be submitted to the concerned department of supervision of the RBI, where the entities are registered.As mentioned in the latest RBI circular, this classification structure does not apply to the NBFCs in the Upper Layer.

Conclusion

The latest RBI circular on Multiple NBFCs in a Group: Classification in Middle Layer provides clarification on the structuring of NBFCs that may have similar promoters or are in a Joint Venture. This restructuring will help the RBI in the identification of the flaws in the regulatory environment and bring about a positive change in the legal and regulatory structure of working of NBFCs in the country. The Apex Bank, through this circular, has yet again strengthened the structure of the non-banking entities, ensuring transparency in reporting and enhancing trust amongst the public.

Read our Article: Decoding the Growth of NBFCs in India