Changes in the regulatory landscape
NBFCs were introduced and conceptualized with the aim of complementing the credit intermediation function of banks, diversifying access to financial services and promoting healthy competition in the financial services sector. In order to promote the growth of NBFCs in line with their objective, the regulatory framework for the regulation of NBFCs has been designed on the fundamental principle of less rigorous regulation, against banking companies.
The regulatory design was deliberately crafted to strike a balance between the operational flexibility available with NBFCs to grow at a sustainable pace and to expand the reach of the formal financial services sector into unbanked areas. Gradually, with the growing nature of NBFCs, a nuanced regulatory framework followed.
With the aim of revising and revisiting the regulatory framework governing NBFCs, RBI, in its statement on development and regulatory policies dated December 4, 2020, proposed a regulatory approach at scale related to the contribution to systemic risk. of NBFCs. It released a discussion paper for public consultation on January 22, 2021 and, based on the contributions received, introduced “Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs” in October 2021.
The SBR regulatory framework classifies NBFCs into 4 layers based on the size, activities and perceived risk of NBFCs. These 4 categories are (i) the base layer – this will include NBFCs not accepting deposit below the size of Rs 1000 crore and NBFCs which only act as a peer to peer lending platform, aggregator accounts, non-operational financial holding company or NBFC that do not benefit from public funds and do not have a client interface; (ii) Mid-Layer – this will include all NBFCs accepting deposits, all NBFCs not accepting deposits with an asset size of Rs 1000 crore and above, and NBFCs acting as a stand-alone prime broker, funds of infrastructure debt, core investment companies, housing finance companies and infrastructure finance companies; (iii) Top Layer – it will have NBFCs which are specifically identified by the RBI requiring increased regulatory oversight based on predetermined parameters and rating methodology. In addition, this layer will always be made up of the 10 largest NBFCs in terms of asset size, regardless of any other factor; and (iv) Top Layer – this layer will only be NBFC which in my opinion from RBI has turned into a potential systemic risk.
The SBR regulatory framework will help RBI keep a close watch on NBFCs and allow RBI to take corrective action and intervene at the right time before a particular NBFC becomes a systematic risk to the economy as a whole. Classification and regulations based on size and assets will also ensure that there will not be a deterrent effect on all categories of NBFCs due to rigorous regulatory oversight on a particular category of NBFC.
The SBR regulatory framework will also educate the general public to identify the risk associated with particular NBFCs. Also, it will be interesting to see how RBI keeps stakeholder interest at the forefront when a particular NBFC is moved from the top layer to the top layer.
Although the SBR framework offers a holistic view, it is expected that the detailed regulatory guidance to be introduced will cover the finer aspects recognizing the immense potential of NBFCs.
– Author’s Veena Sivaramakrishnan is Partner and Yugal Jain is Senior Partner, Shardul Amarchand Mangaldas & Co.
(Edited by : Priyanka Deshpande)