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The Reserve Bank of India (RBI) has issued a notification outlining a consolidated framework for Non-Banking Financial Companies (NBFCs) on October 19, 2023 for the Revised Scale Based Regulatory Regulation 2023. The Scale Based Reporting (SBR) framework which was earlier issued on October 22, 2021 have left some ambiguities and further notification has been issued by Reserve Bank of India wrt ICCAP, CCO appointment and other regulations. In the Previous scale Based regulatory framework, it is divided into systematically and Non-Systematically important.
Every NBFC, in supersession of the Non-Banking Financial Company–Non-Systemically Important Non-Deposit taking (Reserve Bank) Directions, 2016 and Non-Banking Financial Company–Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 issued the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (the Directions), hereinafter specified.
The RBI for the public interest regulate the financial system to prevent the affairs of any NBFCs from being conducted in a manner detrimental to the interest of investors and depositors. The SBR intends to integrate the various regulations for the NBFCs of different scales and functions. The amalgamation has outlined various regulations issued under the SBR framework governing the four layers of the NBFCs to bring clarity to the compliance requirements and to ensure the NBFCs operate in a mentioned framework reliable and transparent. It is also differentiated in various categories of NBFCs based on the size of the assets in their respective layers such as:
Also, previously the NBFCs base and middle layer were related with the systemically and Non-Systemically crucial NBFCs whose assets size is of Rs 500 Crore or more as per the last audited balance sheet are considered as systemically important NBFCs and those with assets under the Rs 500 Cr were considered as Non-Systemically but, the Scale Based Regulations Direction (SBR), 2023 the clarified that the NBFCs with assets less than Rs 1000 Cr are classified as Base Layers entities and those with assets exceeding Rs 1000 Cr are classified as Middle Layer entities depending upon the cases.
The categories of NBFCs, mentioned below, shall be subject to extant regulations governing them, as under:
The directions regarding scale presented by the RBI as a master directions is a crucial amendments to make the regulation of NBFC to bring clarity to the compliance requirements and to ensure the NBFCs operate in a mentioned framework in reliable and transparent manner. The NBFCs previously were classified as systemically important and non-systemically important however in the amendment the RBI introduced the new classification system based on layers and this classification has introduced some changes where the assets size are now classified as a layers. This asset size will create a grey area for NBFCs with assets falling between Rs 500 Cr and Rs 1000 Cr to classify the layers in NBFCs.
This is a directive issued by the RBI that introduces a scale-based regulatory approach for NBFCs. It supersedes the 2016 directions, marking a new approach to regulating Non-Banking Financial Companies in India.
The 2023 Master Direction moves away from the binary categorization used in 2016 and introduces a scale-centric framework. Regulations are tailored based on the operational size of an NBFC, allowing for more flexibility.
The directive is grounded in sections 45JA, 45K, 45L, and 45M of the Reserve Bank of India Act, 1934, and specific provisions from the Factoring Regulation Act, 2011.
Smaller NBFCs stand to benefit from more operational freedom under the scale-based model, potentially leading to more entities entering the sector.
Larger NBFCs will be under heightened scrutiny due to their potential to introduce systemic risks. The regulations for these entities will be more stringent.
The exact metrics for 'scale' will be crucial and could be based on assets, client base, loan portfolios, or a combination of these factors.
Directors are pivotal figures in NBFCs, responsible for steering the company and ensuring adherence to regulations. The directive emphasizes their role, outlining duties that span beyond mere administrative oversight.
SROs are entities that play a crucial role in ensuring NBFCs adhere to the Master Direction. Once recognized, they report developments, submit annual reports, and conduct investigations, among other tasks.
The RBI can inspect the books of SROs directly or commission an audit firm for the same. This authority ensures transparency and adherence to regulations within the sector.
This directive charts a promising future for NBFCs in India by establishing clear roles, introducing the concept of SROs, and setting a robust compliance mechanism. It underscores the RBI's commitment to a transparent, resilient, and growth-oriented NBFC sector.
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