RBI Reviews Scale-Based Regulation for NBFCs

The Reserve Bank of India (RBI) has initiated a review of the Scale-Based Regulation (SBR) framework for NBFCs. Non-Banking Financial Companies are playing a bigger role in India’s economy. With their rapid growth, risks have also increased. The move aims to ensure financial stability and effective supervision.

Why in the news?

The Reserve Bank of India (RBI) is initiating a review of the Scale-Based Regulation (SBR) framework for Non Banking Financial Companies (NBFCs). Introduced in 2022, the SBR framework classifies NBFCs into different regulatory layers based on their size, risk profile, and systemic importance.

What is Scale Based Regulation (SBR)?

• Scale-Based Regulation is a risk-oriented regulatory framework for NBFCs.
• It ensures that larger and riskier NBFCs face stricter regulation than smaller ones.
• The idea is to balance growth with financial stability.
• Regulatory intensity increases as the potential systemic impact of an NBFC rises.

Layers Under the SBR Framework

Base Layer (NBFC-BL)

• This layer includes non deposit taking NBFCs with assets below ₹1,000 crore.
• It also covers entities such as Peer-to-Peer (P2P) lending platforms, Account Aggregators, and Non-Operative Financial Holding Companies.
• The Base Layer accounts for 5.2% of total NBFC assets.
• Regulatory requirements here are relatively lighter.

Middle Layer (NBFC-ML)

• The Middle Layer includes all deposit taking NBFCs, irrespective of asset size.
• It also includes non-deposit taking NBFCs with assets of ₹1,000 crore and above.
• This layer holds the largest share of NBFC assets at 64.6%.
• Given its size, this layer is crucial for overall financial stability.

Upper Layer (NBFC-UL)

• NBFCs in this layer are specifically identified by the RBI.
• Selection is based on parameters such as size, leverage and interconnectedness.
• These NBFCs require enhanced regulatory and supervisory oversight.
• The Upper Layer accounts for 30.2% of total NBFC assets.

Top Layer

• The Top Layer is meant for NBFCs that pose extreme supervisory risks.
• Such NBFCs would face intensive and continuous supervision.
• Ideally, this layer is expected to remain empty, acting as a deterrent.

Why is RBI Reviewing the SBR Framework?

• NBFCs are increasingly interconnected with the banking system.
• Stress in large NBFCs can quickly spread to banks and financial markets.
• There has been a rise in unsecured loans, increasing credit risk.
• The scale and complexity of NBFC operations have grown since 2022.
• The review aims to ensure that regulations remain relevant and forward-looking.

About NBFCs

• A Non-Banking Financial Company (NBFC) is registered under the Companies Act, 1956 or 2013.
• NBFCs are mainly engaged in lending, investment, leasing, and hire-purchase activities.
• They play a key role in providing credit to sectors underserved by banks.

Key Data at Glance

Question

Q. Which NBFC layer under the SBR framework holds the largest share of total NBFC assets?

A. Base Layer
B. Middle Layer
C. Upper Layer
D. Top Layer