Reserve Bank of India (RBI) has proposed key amendments to the Scale Based Regulatory (SBR) framework for Non-Banking Financial Companies (NBFCs). Under the existing framework, NBFCs are classified into four layers: Base, Middle, Upper and Top Layer based on their size, activity and perceived riskiness.
Proposed Amendments
RBI has proposed replacing the current complex scoring model for identifying Upper Layer NBFCs with a simpler criterion, any NBFC with an asset size of Rs 1 lakh crore or more will be classified as an Upper Layer NBFC. This threshold will be reviewed every five years.
Additionally, government-owned NBFCs such as NABARD, Exim Bank and SIDBI, which were previously exempt, will now be subject to the same regulations as private Upper Layer NBFCs.
Upper Layer NBFCs will also be permitted to use state government guarantees as a credit risk transfer mechanism without any quantitative caps.
What is an NBFC?
- An NBFC is a company registered under the Companies Act, 1956 or 2013, engaged in the business of loans, advances and acquisition of securities.
- NBFCs are primarily regulated by the RBI under Chapter III B of the RBI Act, 1934. However, specific types of non-banking financial entities fall under other regulators, for instance, Insurance Companies are regulated by IRDAI and Stock Broking and Merchant Banking by
Key Differences Between Banks and NBFCs
- NBFCs cannot accept demand deposits and do not form part of the payment and settlement system.
- Depositors of NBFCs do not enjoy the deposit insurance facility of DICGC. However, Standalone Primary Dealers registered as NBFCs with RBI can access the Liquidity Adjustment Facility (LAF).
- As an exception, only those NBFCs holding a specific deposit-accepting Certificate of Registration with a minimum investment-grade credit rating of ‘BBB-‘ are permitted to accept deposits.