The Reserve Bank of India (RBI) has implemented a Scale-Based Regulatory (SBR) framework for Non-Banking Financial Companies (NBFCs) to enhance oversight and ensure financial stability.
This framework, detailed in the Master Direction issued on October 19, 2023, categorizes NBFCs into four layers—Base, Middle, Upper, and Top—based on size, activity, and systemic importance. Each layer is subject to specific regulatory norms, and it is crucial for professionals, including company secretaries, to understand the compliance requirements that govern this sector.
Classification of NBFCs Under the SBR Framework
- Base Layer (NBFC-BL)
This includes non-deposit-taking NBFCs with assets below ₹1,000 crore. Generally, niche entities such as NBFC-Peer to Peer Lending Platforms, NBFC-Account Aggregators, and those without public funds or customer interface fall under this category.
- Middle Layer (NBFC-ML)
This layer comprises all deposit-taking NBFCs irrespective of asset size and non-deposit-taking NBFCs with assets of ₹1,000 crore and above. It includes Standalone Primary Dealers, Infrastructure Debt Fund-NBFCs, Core Investment Companies, Housing Finance Companies, and Infrastructure Finance Companies.
- Upper Layer (NBFC-UL)
NBFCs in this category are identified by the RBI as systemically significant based on a set of parameters and scoring methodology. The top ten eligible NBFCs by asset size are automatically included in this category.
- Top Layer (NBFC-TL)
This layer remains ideally empty but may be populated if the RBI perceives substantial systemic risk from specific NBFCs in the Upper Layer.
“The RBI’s Scale-Based Regulatory framework is a game-changer for NBFCs, reinforcing financial stability while ensuring structured compliance.”
Key Compliance Requirements
- Net Owned Fund (NOF) Requirements
For NBFC-Investment and Credit Companies, NBFC-Microfinance Institutions, and NBFC-Factors, the NOF has been increased to ₹10 crore. The transition path mandates ₹5 crore by March 31, 2025, and ₹10 crore by March 31, 2027. However, for NBFC-Peer to Peer Lending Platforms, NBFC-Account Aggregators, and those without public funds and customer interface, the NOF requirement remains at ₹2 crore.
- Asset Classification and NPA Recognition
NBFCs in the Base Layer will transition to a 90-day Non-Performing Asset (NPA) recognition period in a phased manner:
- By March 31, 2024, NPAs must be recognized beyond 150 days overdue.
- By March 31, 2025, NPAs must be recognized beyond 120 days overdue.
- By March 31, 2026, NPAs must be recognized beyond 90 days overdue.
NBFCs in the Middle and Upper Layers are already required to adhere to the 90-day NPA norm.
- Capital Adequacy Requirements
NBFCs in the Upper Layer must maintain a Common Equity Tier 1 capital of at least 9% of their Risk Weighted Assets, in addition to complying with leverage requirements as prescribed by the RBI.
- Corporate Governance Norms
- The Board of Directors must include at least one director with experience in the banking or NBFC sectors.
- The establishment of a Risk Management Committee is mandatory for NBFCs in the Middle and Upper Layers to oversee various risks, including liquidity risk.
- The appointment of a Chief Compliance Officer is required to ensure an independent compliance function.
- Exposure Norms
- The credit exposure to a single borrower or party should not exceed 25% of Tier I capital.
- The credit exposure to a single group of borrowers or parties should not exceed 40% of Tier I capital.
- NBFCs must have Board-approved internal limits for sensitive sector exposures, such as capital markets and commercial real estate.
- Additional Regulatory Measures
- The RBI has introduced a specific limitation on Initial Public Offering (IPO) financing, capping it at ₹1 crore per borrower.
NBFCs with ten or more branches must implement a Core Banking Solution (CBS) within three years from October 1, 2022, to enhance operational efficiency and reporting standards.
Compliance Planning for NBFCs
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- Assessment and Classification
NBFCs should determine the regulatory layer applicable to them based on their asset size and activities. Since transitions between layers are possible as businesses grow, regular monitoring of asset size and operational changes is essential.
- Policy Formulation and Implementation
The formulation of internal policies is crucial to address capital adequacy, asset classification, exposure limits, and corporate governance requirements. These policies should be reviewed periodically by the Board to ensure compliance with evolving regulatory expectations.
- System and Process Upgradation
Investing in technology, particularly for reporting and risk management, is advisable. Implementing robust internal control mechanisms helps mitigate risks and ensures regulatory adherence.
- Training and Capacity Building
Continuous training programs should be conducted for the Board, senior management, and operational staff to keep them informed about regulatory developments and compliance obligations.
- Engagement
NBFCs should maintain open communication with the Company Secretaries to seek clarifications, understand regulatory expectations, and address concerns. Participation in industry forums and discussions can help NBFCs stay updated on policy developments and best practices.
Conclusion
The RBI’s Scale-Based Regulation framework aims to strengthen the resilience of the NBFC sector while ensuring financial stability. A proactive and well-structured compliance strategy helps NBFCs mitigate risks, enhance credibility, and sustain long-term growth. As company secretaries, our role in ensuring governance, regulatory adherence, and strategic advisory is instrumental in navigating this evolving landscape. A meticulous approach to compliance planning, coupled with continuous engagement with regulatory authorities, will enable NBFCs to operate within the regulatory framework effectively while fostering trust among stakeholders.
“A well-planned compliance strategy fosters trust, mitigates risks, and ensures sustainable growth for NBFCs.”
Disclaimer:
The content of this article is intended for informational purposes only and should not be construed as professional advice. While we strive to ensure the accuracy and reliability of the information provided, we make no warranties or representations regarding its completeness or applicability. Readers are encouraged to seek professional guidance tailored to their specific circumstances. The views and opinions expressed in the article are those of the author and do not necessarily reflect the official policy or position of our organization.
