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RBI’s Scale-based Regulations for NBFCs
Certain issues regarding the scale-based regulation framework for non-banking financial companies laid out by the Reserve Bank of India are scrutinised. These pertain to divergence with globally adopted definition of systemically important and differences in the usage of two literally identical terms, namely systemically important and systemically significant, by the RBI, coupled with irregularities in the measurement of perceived riskiness, the adoption of the binary concept rather than the continuum concept of systemically important NBFCs with regard to top 10 asset size-based inclusion in the upper layer, inclusion of systemically significant NBFCs for a minimum period of five years, supervision on calibrated increment of business, and the relevance of the top layer.
The Reserve Bank of India (RBI) on 22 October 2021 published the scale-based regulation (SBR) for non-banking financial companies (NBFCs). The idea behind subjecting the sector to SBR is to align the regulations in line with the changing risk profiles of NBFCs which have grown substantially and have become systemically significant in the past few years. For the purpose, the NBFC sector will be classified into four layers—base layer, middle layer, upper layer and top layer. There are three bases of division of these four layers, namely size, activity, and perceived riskiness. Companies populating the upper layer, will be termed as systemically significant and they will be identified based on two criteria. First, top 10 asset-wise NBFCs will always remain in the upper layer, and second, a parametric scoring methodology will be applied on the sample of 50 NBFCs, excluding the top 10, which will be chosen on the basis of their total exposure from the middle layer. Once an NBFC is identified to be placed in the upper layer, then it will be given a period of a maximum of 24 months to adhere to the enhanced prudential regulations defined for the upper layer. In the meantime, calibrated increment in business will be allowed through supervisory engagement.
NBFCs placed in the upper layer will be subject to enhanced prudential regulations for a period of at least five years even if it does not meet the parametric criteria for subsequent years from the date of its inclusion in the layer. In order to move out of the upper layer, the NBFC either has to elude the criteria for classification for five consecutive years or voluntarily scale down its operations. At the end, there will be a top layer which will consist of those NBFCs from the upper layer that RBI would consider to have grown excessively in posing potential systemic risk and shall be made subject to higher and intensive regulatory framework.
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