RBI Tightens Oversight of NBFCs Under Revised Scale-Based Regulation Framework

The Reserve Bank of India (RBI) has introduced the scale-based regulation framework for the Non-Banking Financial Companies (NBFCs) and it aims to strengthen the financial stability and improve regulatory oversight. This updated norms bring bank-owned NBFCs under the stricter supervision, revise exposure limits and allows the more frequent reviews of the threshold for upper-layer NBFCs. This reforms are important as the NBFCs continue to plays the critical role in the credit delivery and economic growth.

What Is Scale-Based Regulation for NBFCs?

Scale-Based Regulation (SBR) is the RBI’s framework for regulating the NBFCs as per their size, complexity, interconnectedness and risk profile.

Instead of applying the identical regulations to all the NBFCs, the framework categorizes them into different layers,

• Base Layer (NBFC-BL)
• Middle Layer (NBFC-ML)
• Upper Layer (NBFC-UL)
• Top Layer (NBFC-TL)

The objective is to impose the stricter regulatory requirements on the larger and systemically important NBFCs while maintaining the proportionate regulation for smaller entities.

Key Changes Announced by RBI

The latest revisions introduce the several important regulatory measures that are aimed at to strengthening governance and risk management.

More Frequent Review of Upper Layer Threshold

Earlier, the ₹1 lakh crore asset threshold used to identify the Upper Layer NBFCs was reviewed every five years.

Under the revised framework,

• The threshold will now be reviewed every three years.
• RBI can respond faster to the inflation, economic growth and emerging financial risks.
• Regulatory classification will also remain more aligned with market realities.

Stricter Oversight of Bank-Owned NBFCs

One of the most significant changes involves the NBFCs which belongs to banking groups.

Upper Layer Norms for All Bank-Led NBFCs

RBI has decided that the,

• All the bank-promoted NBFCs will be subject to Upper Layer regulatory norms.
• This applies regardless of their asset size.
• The only exemption relates to the listing requirements.

Bank-Like Regulations for Similar Activities

The central bank has also clarified that,

• NBFCs operating within the bank groups have to must comply with the regulations applicable to banks when carrying out similar business activities.
• This requirement applies directly irrespective of their regulatory classification.

The measure aims to prevent the regulatory arbitrage, where the similar financial activities operate under different levels of supervision.

Why RBI Is Tightening Regulation

The NBFC sector has become the major component of India’s financial system.

NBFCs provides the,

• Retail loans
• Vehicle financing
• Housing finance
• Infrastructure funding

Revised Large Exposure Framework

RBI has also modified the large exposure norms applicable to NBFCs.

What Are Large Exposure Limits?

Large exposure limits restrict the amount an the institution which can lend to a single borrower or group of the connected borrowers.

The purpose is to,

• Prevent the concentration risk
• Reduce the losses from a single default
• Also strengthen the overall financial resilience

Uniform Standards for Government-Owned NBFCs

A major change is the removal of the exemptions previously available to the government-owned NBFCs.

Under the revised framework,

• Government-owned NBFCs must now comply with the same exposure limits as other NBFCs.
• Existing excess exposures may also continue until maturity.
• No fresh lending beyond the prescribed limits will be allowed.

This move promotes regulatory consistency across the sector.

Relief for Infrastructure Finance Companies

The RBI has simultaneously provided the greater flexibility to Infrastructure Finance Companies (IFCs).

Enhanced Exposure Limits

Infrastructure finance companies can now,

• Extend the exposure up to 45% of Tier 1 capital.
• Benefit from higher lending capacity for the infrastructure projects.