{"id":11482,"date":"2022-08-01T08:43:01","date_gmt":"2022-08-01T08:43:01","guid":{"rendered":"https:\/\/swaritadvisors.com\/blog\/?p=11482"},"modified":"2022-08-01T08:50:53","modified_gmt":"2022-08-01T08:50:53","slug":"scale-based-regulations-for-nbfc","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/blog\/scale-based-regulations-for-nbfc\/","title":{"rendered":"Scale-Based Regulations for NBFC: New Classification"},"content":{"rendered":"\n<p class=\"has-drop-cap\">The Reserve Bank of India, through its\ncircular released on the 19th of April earlier this year, laid out guidelines\nrelating to advances by NBFCS and the mandatory disclosures they are supposed\nto make per the new scale-based regulations. RBI has defined aggregate exposure of NBFCs- The upper Layer NBFCs must not exceed 20 percent of its capital base, but its limit can be extended to 25 percent after obtaining approval from the board, which means that upper layer NBFCs can have a maximum of 25 percent of the capital base for aggregate exposure.<\/p>\n\n\n\n<p>However, if the NBFC is a financial infrastructure company, then the aggregate limit shall be 30 for a single entity and 35 percent for a group of entities.<\/p>\n\n\n\n<p>This blog shall throw light upon the new scale-based regulations for NBFC and the rules surrounding them.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a5496dad99ed\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a5496dad99ed\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/blog\/scale-based-regulations-for-nbfc\/#Different_Scales_of_NBFCs_and_what_they_signify\" title=\"Different Scales of NBFCs and what they signify?\">Different Scales of NBFCs and what they signify?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/blog\/scale-based-regulations-for-nbfc\/#What_is_the_need_for_new_scale-based_regulations_for_NBFC\" title=\"What is the need for new scale-based regulations for NBFC?\">What is the need for new scale-based regulations for NBFC?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/blog\/scale-based-regulations-for-nbfc\/#What_does_the_new_scale-based_regulations_for_NBFC_mean_for_the_customers\" title=\"What does the new scale-based regulations for NBFC mean for the customers?\">What does the new scale-based regulations for NBFC mean for the customers?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/blog\/scale-based-regulations-for-nbfc\/#What_are_the_Changes_Introduced_by_new_scale-based_regulations_for_NBFCs\" title=\"What are the Changes Introduced by new scale-based\nregulations for NBFCs?\">What are the Changes Introduced by new scale-based\nregulations for NBFCs?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/blog\/scale-based-regulations-for-nbfc\/#Conclusion\" title=\"Conclusion:\">Conclusion:<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Different_Scales_of_NBFCs_and_what_they_signify\"><\/span>Different Scales of NBFCs and what they signify?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Reserve bank decided to classify the NBFCs based on factors such as size, risk of the activities being carried and their exposure. NBFCs were categorised into four layers: the base, middle, upper and top layers. The new scale-based regulations for NBFC is bound to be stricter as we progress through each layer.<\/p>\n\n\n\n<ul><li><strong>Base Layer:<\/strong> This layer shall include NBFCS that are non-deposit taking and have an assets size of less than Rs.1000 crore. This layer includes account aggregators and peer-to-peer platforms. RBI shall follow the &#8220;light-touch regulations&#8221; whilst dealing with this layer.<\/li><li><strong>Middle Layer:<\/strong> Middle layer NBFCs are deposit-taking NBFCs with asset size of over 1000 crore, according to the <strong>RBI<\/strong><sup><a class=\"text-primary\" href=\"https:\/\/en.wikipedia.org\/wiki\/Reserve_Bank_of_India\"><strong>[1]<\/strong><\/a><\/sup>. Infrastructure debt Funds,  infrastructure finance companies, independent Primary dealers, core investment companies and housing finance companies fall under this layer.<\/li><li><strong>Upper Layer:<\/strong> Upper Layer shall consist of NBFCs, categorised as RBI as      &#8220;NBFCs warranting enhanced regulatory requirement&#8221;. The abovementioned enhanced regulatory requirement calculation shall be based on parameters and scoring methodology set by the RBI. The top ten NBFCs,  based on their asset size, shall always comprise of the upper layer.<\/li><li><strong>Top Layer: <\/strong>The Top Layer NBFC shall remain empty until RBI believes there is a systemic threat to NBFCs in the upper layer. And only in such cases an NBFC from the upper layer be moved to the top layer.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_need_for_new_scale-based_regulations_for_NBFC\"><\/span>What is the need for new scale-based regulations for NBFC?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Based on the\nfailure of NBFCs such as Infrastructure Leasing and Financial Services and the\nDewan Housing Finance Corporation Ltd. Crisis. The Reserve bank has become\ncautious and wants more strict regulations to govern the NBFCs. The NBFCs have\nevolved significantly over the years. There have been numerous factors in the\nsector, such as size, capital, complexity and the interconnection with the\nfinancial system from the earlier days of NBFCs. And the regulations must be\ndynamic to keep at par with the sector&#8217;s growth; therefore, new rules were\nrequired to be implemented to align NBFCs with the changing risks.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_does_the_new_scale-based_regulations_for_NBFC_mean_for_the_customers\"><\/span>What does the new scale-based regulations for NBFC mean for the customers?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>RBI intended to bring more stability to the NBFC governance structure through the new scale-based regulations. Through this step, RBI tends to limit the failure of NBFC, becoming a reoccurring scenario. Once the new regulations are implemented in totality, they will encourage the practice of responsible lending and borrowing. The tightened norms shall make the system more transparent and efficient, resulting in a better customer and investor experience.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Changes_Introduced_by_new_scale-based_regulations_for_NBFCs\"><\/span>What are the Changes Introduced by new scale-based\nregulations for NBFCs?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li><strong>Introduction of Ceiling for IPO Financing<\/strong><\/li><\/ul>\n\n\n\n<p>The\u00a0 Reserve Bank of India, intending to curb the risks in the financial sector, decided to cap the IPO financing to a maximum of Rs. 1 crore per borrower. IPO financing is offered to high-net-worth individuals. The idea behind this is that NBFCs lend out loans to people with the sole purpose of applying for an IPO. In this, the Investor sells his shares quickly as soon as they are listed and earns a profit. If the Investor can make a profit, then the loan is paid back with interest to the NBFC. If it results in a loss, the Investor is liable to pay back the principal amount with interest out of his pocket.<\/p>\n\n\n\n<p>The problem with this kind of practice is that it hampers the\ninterest of genuine long-term investors. Acts such as these keep the market\nvolatile and normal investors become reluctant to invest in the market.\nTherefore if a cap is introduced for such types of borrowings, it will help to\nkeep the market more stable. <\/p>\n\n\n\n<p>Banks have a ceiling for IPO financing, which is kept at Rs. 10 Lakh\nINR, but there are no such rules for NBFCs prior to the incorporation of such\nguidelines. This cap applies across all layers of NBFCS, as mentioned by the\nRBI, to prevent abuse of funds.<\/p>\n\n\n\n<p>This limit is applicable to one &#8220;borrower&#8221; only instead of\nan &#8220;individual&#8221; this shall allow room for corporates to borrow funds\nfor IPO financing.<\/p>\n\n\n\n<ul><li><strong>Non-performing Asset classification changed from 180 to 90 days.<\/strong><\/li><\/ul>\n\n\n\n<p>The new regulations have fixed the overdue period of more than 90 days to classify a borrower as a Non-Performing Asset. Earlier all the NBFCS had enjoyed a period of more than Six to classify an asset as an NPA and more than twelve months in case of lease rental and hire purchase installments.<\/p>\n\n\n\n<p>All the NBFCs, irrespective of their type, have to follow the norms\nto classify a borrower as an NPA on payment for 90 days.<\/p>\n\n\n\n<ul><li><strong>Net Owned Funds increased from 2cr to 10cr.<\/strong><\/li><\/ul>\n\n\n\n<p>An NBFC cannot operate unless it has a minimum net owned funds (NOF). Previously, the minimum net owned fund requirement for NBFCs was 2 crores; the new regulations have now increased to 10 crores. The Reserve Bank introduced these changes for NBFC-ICC (investment and credit company), NBFC- MFI (microfinance institution) and NBFC-factors. This change shall be applicable from the 31st of March 2027. NBFCs that have non-public funds, NBFC P2P and NBFC AA, shall continue to have a minimum NOF of 2cr.<\/p>\n\n\n\n<p>RBI&#8217;s rationale behind introducing this is that a minimum NOF of 2 crores had welcomed a lot of entities that were not interested in seriously carrying out the<strong> <a href=\"https:\/\/swaritadvisors.com\/nbfc-registration\" class=\"text-primary\">NBFC business<\/a><\/strong>. For an NBFC to be successful, it should have sufficient capital, be financially sound to withstand uncertainties and be well regulated. That&#8217;s why to introduce the spirit of strong financial institutions amongst NBFC. The limit was raised from 2 crore to 10 crores.<\/p>\n\n\n\n<ul><li><strong>New Board member requirements:<\/strong><\/li><\/ul>\n\n\n\n<p>The reserve bank made it mandatory for NBFCs to have at least one\ndirector with relevant experience working at a bank or an NBFC. RBI&#8217;s intent\nbehind this move is to imbibe the concept of corporate governance in all NBFCs.\nThis shows RBIs eagerness to incorporate corporate governance, which was\nseverely lacking in the NBFC space, and relevant experience in this sphere\nshall help NBFCs attain stability in their operations.<\/p>\n\n\n\n<p>These major changes in new scale-based regulations for NBFC is vital for the future of NBFCs in India.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion:<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>NBFCs were given a lot of operational freedom compared to the banks, which increased their popularity and gradually made them an inseparable part of the financial sector. However, the effects of this operational freedom were felt later when the NBFCs started to fail, affecting the financial ecosystem severely. That&#8217;s why RBI introduced new scale-based regulations for NBFC to restore stability to the NBFCs. This shall also rekindle the faith of both consumers and investors in NBFCs again.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our Article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/digitalisation-in-loan-products-for-new-nbfcs\/\">Advantages of digitalisation in loan products for new NBFCs<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Reserve Bank of India, through its circular released on the 19th of April earlier this year, laid out guidelines relating to advances by NBFCS and the mandatory disclosures they are supposed to make per the new scale-based regulations. RBI has defined aggregate exposure of NBFCs- The upper Layer NBFCs must not exceed 20 percent [&hellip;]<\/p>\n","protected":false},"author":12,"featured_media":11483,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[58],"tags":[1057],"acf":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/11482"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/users\/12"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=11482"}],"version-history":[{"count":12,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/11482\/revisions"}],"predecessor-version":[{"id":11498,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/11482\/revisions\/11498"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media\/11483"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=11482"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=11482"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=11482"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}