{"id":2276,"date":"2021-02-13T09:45:06","date_gmt":"2021-02-13T09:45:06","guid":{"rendered":"https:\/\/swaritadvisors.com\/blog\/?p=2276"},"modified":"2021-02-13T09:49:56","modified_gmt":"2021-02-13T09:49:56","slug":"revised-regulatory-framework-proposed-by-rbi-for-nbfcs","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/","title":{"rendered":"Revised Regulatory Framework Proposed by RBI for NBFCs"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Over the years, NBFCs are turning systemically\nsignificant owing to their complexity, size and interconnectedness, the RBI has\nworked on to review the regulatory framework of NBFCs by adopting a scale based\napproach. Keeping in view with the recent difficulties faced in this sector,\nRBI stated that it has become imperative to re- examine the sustainability of\nthe regulatory approach. Unconstrained growth with the help of less rigorous\nframework within an interconnected financial system would create systemic risk.\nThe RBI introduced regulatory frameworks for <strong><a href=\"https:\/\/swaritadvisors.com\/nbfc-registration\" class=\"text-primary\">NBFCs<\/a><\/strong> in\norder to keep pace with the changing realities. This article will discuss about\nthe revised regulatory framework proposed by RBI for NBFCs.<\/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-6a554c9f51290\" 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-6a554c9f51290\"  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\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#Need_for_Revised_Regulatory_Framework\" title=\"Need for Revised\nRegulatory Framework\">Need for Revised\nRegulatory Framework<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#Base_Layer_NBFC-_BL\" title=\"Base Layer\n(NBFC- BL)\">Base Layer\n(NBFC- BL)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#Middle_Layer\" title=\"Middle Layer\">Middle Layer<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#IPO_Financing\" title=\"IPO Financing\">IPO Financing<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#Upper_Layer\" title=\"Upper Layer\">Upper Layer<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#Top_Layer\" title=\"Top Layer\">Top Layer<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/blog\/revised-regulatory-framework-proposed-by-rbi-for-nbfcs\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Need_for_Revised_Regulatory_Framework\"><\/span>Need for Revised\nRegulatory Framework<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The RBI released a discussion paper on the revised regulatory framework in December 2020 policy, for NBFCs, which grouping NBFCs into 4 layers as it embarks on the path of scale- based regulation in the backdrop of the recent difficulties and stress in the sector. Such four layers are Base Layer (NBFC- BL), Middle Layer (NBFC- ML), Upper Layer (NBFC- UL), and a possible Top Layer (NBFC- TL). Regulations around concentration norms, capital requirement, governance and disclosure have been initiated for each layer:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/infographic-for-swarit-blog-2.png\" alt=\"Need for Revised Regulatory Framework\" class=\"wp-image-2283\" width=\"427\" height=\"291\" srcset=\"https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/infographic-for-swarit-blog-2.png 985w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/infographic-for-swarit-blog-2-300x204.png 300w, https:\/\/swaritadvisors.com\/blog\/wp-content\/uploads\/2021\/02\/infographic-for-swarit-blog-2-768x523.png 768w\" sizes=\"(max-width: 427px) 100vw, 427px\" \/><\/figure><\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Base_Layer_NBFC-_BL\"><\/span>Base Layer\n(NBFC- BL)<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Around 9,209 NBFCs will be added in the Base\nLayer (BL) which may consist of NBFCs currently classified as non- systemically\nimportant NBFCs (NBFC- ND\/ Non- Deposit taking), account aggregators, Non-\nOperative Financial Holding Company, Peer- to peer lending platforms and NBFCs\nup to Rs. 1,000 crore asset size. As low entry point norms raises the chances of\nfailure resulting from poor governance of non- serious players, the Central Bank\ntakes the initiate to plans to revise these norms for NBFC- BL from Rs. 2 crore\nto Rs. 20 crore. RBI comes up with harmonising the surviving NPA (non-\nperforming asset) classification norm of 90 days to 180 days for NBFC- BL. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Middle_Layer\"><\/span>Middle Layer<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Entities currently classified as NBFC- ND\/ Non- Deposit taking- Systemically Important, housing finance companies, infrastructure debt funds, infrastructure finance companies, core investment companies, standalone primary dealers and deposit taking NBFCs are considered for NBFCs in the Middle Layer (ML). Where no changes are proposed in minimum capital requirement for NBFC- ML, RBI stated that the linkages of their exposure limits are proposed to be changed to Tier 1 capital from Owned Funds as currently applicable for banks.<\/p>\n\n\n\n<p><strong>Also, Read:<\/strong> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/pros-and-cons-of-non-convertible-debentures-issued-by-nbfc\/\">Pros and Cons of Non Convertible Debentures (NCD) Issued by NBFC<\/a><\/mark><\/p>\n\n\n\n<p>The existing credit concentration limits\nprescribed for NBFC- ML for their investment and lending can be merged into a\nsingle exposure limit of 25% for the single borrower and 40% for a group of\nborrowers anchored to the NBFCs Tier 1 capital. This is not as stringent as for\nbanks which currently have single and group exposure limits of 20% and 25%\nrespectively. Provided that systemically important NBFCs already follow a 90\ndays NPA classification norm, so there will not be an impact on the middle\nlayer NBFCs. The standard asset provisioning of 0.4% remains unchanged. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"IPO_Financing\"><\/span>IPO Financing<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>While emphasizing that <a href=\"https:\/\/en.wikipedia.org\/wiki\/Initial_public_offering\">Initial Public Offer<\/a> (IPO) financing by individual NBFCs more for their abuse of system has come under scrutiny, the paper proposed to fix a ceiling of Rs. 1 crore per individual for any NBFC. NBFCs are at liberty to select more conservative limits. Also, a sub- limit within the commercial real estate exposure ceiling must be fixed internally in order to finance the land acquisition.<\/p>\n\n\n\n<p>According to the regulatory framework, a few restrictions are extended to NBFC- ML, including not allowing then to provide loans to the companies for buy back of securities and shares. The guidelines on sale of stressed assets y NBFCs will be modified on similar bases as that for banks. The paper suggested that NBFCs having ten and more branches are mandatorily required to adopt Core Banking Solution. Further it recommended a uniform tenure of 3 consecutive years applicable for statutory auditors of NBFC. It suggested the appointment of functionally independent Chief Compliance Officer.<\/p>\n\n\n\n<p>To address issues arising out of excessive risk- taking caused by misaligned compensation packages, the compensation guidelines for NBFCs along the lines of banks can be considered. Also making some disclosures prescribed for banks applicable to NBFCs will bring great transparency and at the same time shall provide better understanding to the stakeholders regarding the entity.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Upper_Layer\"><\/span>Upper Layer<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>NBFCs which are identified as systemically important among them inviting new regulatory superstructure is considered under Upper Layer. This layer consists of NBFCs having large potential of systemic reach of risks and may impact financial stability. There is no parallel for this layer currently and this will be a new layer for the revised regulatory framework.<\/p>\n\n\n\n<p>The regulatory framework proposed by RBI for NBFCs falling in this layer will be bank- like, though with appropriate and suitable modifications. It is expected that total of not more than 25 to 30 NBFCs will occupy this layer. It is felt that Common Equity Tier (CET) 1 capital can be introduced for NBFC0 UL to enhance the quality of regulatory capital. It is initiated that CET 1 may be directed at 9% within the Tier 1 capital. The paper also suggested that NBFC- UL must be prescribed with differential standard asset provisioning on bank lines. Given the higher systemic risk posed by NBFC- UL, the Large Exposure Framework (LEF) as applied to bank may be extended with suitable adaptation.<\/p>\n\n\n\n<p>The NBFC- UL are needed to be subjected to the mandatory listing requirement and should follow the consequent listing obligations and disclosure requirements.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Top_Layer\"><\/span>Top Layer<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Considered\nsupervisory judgment might push some NBFCs out from the upper layer of the\nsystemically significant NBFCs for higher supervision or regulation. Such NBFCs\nwill occupy the top of the upper layer as a distinctive set. Basically, this\ntop layer of the pyramid will remain empty unless supervisors view specific\nNBFCs. That is, if some NBFCs being in the upper layer are seen having extreme\nrisks as per the supervisory judgement, they can be added to significantly\nhigher supervisory or regulatory requirements.<\/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> The RBI has taken initiative to set strong and well governed NBFCs that can promote resilience in the financial system by providing much required backup within the system. And thus, revised regulatory framework proposed by RBI for NBFCs for its tremendous growth and working.<\/p>\n\n\n\n<p><strong>Also, Read:<\/strong> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/know-the-factors-which-led-to-the-growth-of-indian-nbfcs\/\">Know the Factors which led to the growth of Indian NBFCs<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Over the years, NBFCs are turning systemically significant owing to their complexity, size and interconnectedness, the RBI has worked on to review the regulatory framework of NBFCs by adopting a scale based approach. Keeping in view with the recent difficulties faced in this sector, RBI stated that it has become imperative to re- examine the [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":2277,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[58,56],"tags":[382],"acf":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/2276"}],"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\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=2276"}],"version-history":[{"count":7,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/2276\/revisions"}],"predecessor-version":[{"id":2285,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/2276\/revisions\/2285"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media\/2277"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=2276"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=2276"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=2276"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}