NBFCs have typically enjoyed a less intense regulatory structure as compared to Banks. However, with the increase in the size, interconnectedness, and complexity of the operations of NBFCs, this picture is changing.
The Reserve Bank of India is proposing to increase the compliance norms significantly with reference to the NBFCs. The Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs was issued on October 22, 2021 to usher in the new era of increased governance. The Regulations present the most sweeping change in the regulatory structure of the NBFCs. The Regulations are applicable from October 1, 2022. Hence, the upcoming 6 months are required to be utilised by the NBFCs to properly restructure their existing corporate structure, governance norms, and internal systems.
The Revised Regulatory Structure
The NBFCs are proposed to be divided into 4 layers which shall decide the level of regulations for the NBFCs. You may read our earlier articles about the types, CICs, and MFIs to know more about them. The proposed layers and their limits are as follows:
| Base Layer |
|
| Middle Layer |
|
| Upper Layer | NBFCs identified by the RBI which require enhanced regulatory requirement. |
| Top Layer | Only those NBFCs which are temporarily moved into this layer if the risk rises. This layer shall generally remain empty. |
NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the Base layer), as the case may be.
NBFC- Investment and Credit Companies (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework.
Governance norms of NBFCs will be as per the layer included.
Changes in net owned funds
Net owned funds are increased drastically for NBFC-ICC, NBFC-MFI and NBFC-Factors which shall be increased to ₹10 crore.
Glide path to achieve ₹10 crore for existing NBFCs shall be as follow
| NBFCs | Current NOF | By March 31, 2025 | By March 31, 2027 |
| NBFC-ICC | ₹2 crore | ₹5 crore | ₹10 crore |
| NBFC-MFI | ₹5 crore (₹2 crore in NE Region) | ₹7 crore (₹5 crore in NE Region) | ₹10 crore |
| NBFC-Factors | ₹5 crore | ₹7 crore | ₹10 crore |
For the NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF shall continue to be ₹2 crore.
The term ‘existing NBFC’ is not defined anywhere in regulation. This has given rise to an ambiguity in the mind of professionals as well as the authorities for interpretation of this terminology. The Para 4 of the regulations state that these guidelines shall be effective from 1st October 2022. Taking into consideration the prospective effect of guidelines, we interpret existing NBFC (as on the date of the regulation) as any NBFCs registered before 1st October 2022 to be covered in this term.
Changes in NPA classification
The existing norms of NPA recognition are being revised from the existing 180 days overdue to 90 days overdue in a gradual manner by March 31, 2026.
Experience of the Board
The Regulations mandate that at least one of the directors shall have relevant experience of having worked in a bank/ NBFC. Presently, at the stage of incorporation, RBI usually insists on such experience. Hence, now it is being formalised in the regulation.
Ceiling on IPO Funding
There shall be a ceiling of ₹1 crore per borrower for financing subscription to Initial Public Offer (IPO). However, NBFCs can fix more conservative (lower) limits. This requirement is applicable from April 1, 2022.
There are other very important and critical aspects in the revised Regulations regarding the capital guidelines, prudential regulations, as well as governance norms. To cover them thoroughly, the Part II of this Article shall cover those aspects.
– Team Efficax