RBI announces list of upper layer NBFCs for 2023-2024, Know about the 4 layers of NBFC

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On September 14, the Reserve Bank of India (RBI) unveiled the roster of non-banking finance companies (NBFCs) categorized under the upper echelon of scale-based regulations for the fiscal year 2023-24.

The list encompasses 15 companies, including notable names such as:

  • LIC Housing Finance
  • Bajaj Finance
  • Shriram Finance
  • Tata Sons Pvt Ltd
  • L&T Finance
  • Piramal Capital
  • Cholamandalam Finance
  • Indiabulls Housing
  • Mahindra and Mahindra Financial Services
  • Tata Capital Financial Services
  • PNB Housing Finance
  • HDB Financial Services
  • Aditya Birla Finance
  • Muthoot Finance
  • Bajaj Housing Finance

The RBI introduced the Scale-Based Regulation (SBR) framework on October 22, 2021. This framework classifies NBFCs into four tiers: the base layer, middle layer, upper layer, and top layer.

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Guidelines for Upper Layer NBFC

Once an NBFC attains the classification of NBFC-UL, it is subjected to heightened regulatory requirements for a minimum of five years, even if it fails to meet the parametric criteria in subsequent years.

Four Layers of NBFC

  • Proposed Classification of NBFC (The Four-Tier Structure): The regulatory and supervisory framework of NBFCs should be based on a four-layered structure:
    • Base Layer:
      • NBFCs in the lower layer will be known as NBFC-Base Layer (NBFC-BL).
      • For NBFCs in this layer least regulatory intervention is warranted.
    • Middle Layer:
      • NBFCs in the middle layer will be known as NBFC-Middle Layer (NBFC-ML)
      • The regulatory regime for this layer will be stricter compared to the base layer.
      • Adverse regulatory arbitrage vis-à-vis banks can be addressed for NBFCs falling in this layer in order to reduce systemic risk spill-overs, where required.
    • Upper Layer:
      • NBFC in the Upper Layer will be known as NBFC-Upper Layer (NBFC-UL) and will invite a new regulatory superstructure.
      • This layer will be populated by NBFCs which have large potential of systemic spill-over of risks and have the ability to impact financial stability.
      • There is no parallel for this layer at present, as this will be a new layer for regulation. The regulatory framework for NBFCs falling in this layer will be bank-like, albeit with suitable and appropriate modifications.
      • If an identified NBFC-UL does not meet the criteria for classification for four consecutive years, it will move out of the enhanced regulatory framework.
    • Top Layer:
      • Ideally this layer is supposed to be empty.
      • It is possible that supervisory judgment might push some NBFCs out of the upper layer of the systemically significant NBFCs for higher regulation/supervision.
      • These NBFCs will occupy the top of the upper layer as a distinct set. Ideally, this top layer of the pyramid will remain empty unless supervisors take a view on specific NBFCs.
      • If certain NBFCs lying in the upper layer are seen to pose extreme risks as per supervisory judgement, they can be put to higher and bespoke regulatory/supervisory requirements.
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