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

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.

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.