MUMBAI: The Reserve Bank of India (RBI) will put in place a four-layered regulatory structure for non-banking financial companies to keep a stricter vigil on the shadow banking sector and minimise risks for the overall financial system.
The detailed set of norms, which will come into force from October 2022, provides for a Scale Based Regulation (SBR) framework that takes into consideration capital requirements, governance standards, prudential regulation and other aspects of the Non-Banking Financial Companies (NBFCs).
The central bank's latest move, after extensive stakeholder consultations, also comes against the backdrop of previous instances, including the collapse of IL&FS in 2018 and later DHFL, that had a spillover impact on the entire financial system, especially in terms of liquidity woes.
Since then, the focus shifted to having tighter regulations rather than a light touch approach for the country's shadow banking sector.
Unveiling the four-layered framework, RBI on Friday said that over the years, the NBFC sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector.
Many entities have grown and become systemically significant, and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile, it said in a statement.
To begin with, the central bank will issue an integrated regulatory framework for NBFCs, providing a holistic view of the SBR structure, set of fresh regulations being introduced and respective timelines.
NBFCs will be split into four layers -- Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and Top Layer (TL).
The Base Layer will consist of NBFCs currently classified as non-systemically important NBFCs (NBFC-non deposit taking), besides Type I NBFCs, non-operative financial holding company, NBFC-P2P (Peer to Peer lending platform) and NBFC-AA (Account Aggregator).
The asset size threshold for this layer will be less than Rs 1,000 crore.
Currently, the threshold for systemic importance is Rs 500 crore.
The Middle Layer will consist of all non-deposit taking NBFCs classified currently as NBFC-ND-SI (Non-Deposit Taking Company-Systematically Important) with asset size of over Rs 1,000 crore and all deposit taking NBFCs irrespective of size.
The upper layer will comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters.
The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor, RBI said.
"The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer," it noted.
Regulatory minimum Net Owned Fund (NOF) for NBFC-Investment and Credit Companies (ICC), NBFC Micro Finance Institution (MFI) and NBFC-Factors would be increased to Rs 10 crore and a glide path has been charted out for meeting this requirement.
However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF will continue to be Rs 2 crore.
The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs.
A glide path is provided to NBFCs in base layer to adhere to the 90 days NPA norm, the statement said.
In order to enhance the quality of regulatory capital, RBI said that NBFC-UL would maintain Common Equity Tier 1 capital of at least 9 per cent of Risk Weighted Assets while they will be required to hold differential provisioning towards different classes of standard assets.
In addition to the CRAR, NBFC-UL will also be subjected to leverage requirement to ensure that their growth is supported by adequate capital, among other factors.
A suitable ceiling for leverage will be prescribed subsequently for these entities as and when necessary.
According to RBI, Housing Finance Companies would continue to follow specific regulation on sensitive sector exposure, as are currently applicable.
There shall be a ceiling of Rs 1 crore per borrower for financing subscription to Initial Public Offer (IPO).
NBFCs can fix more conservative limits, RBI said.
Further, the central bank has outlined large exposure limit for all counterparties and groups of connected counterparties and for the capital market and commercial real estate.
To strengthen corporate governance, it has suggested inclusion of independent directors on the board, among other requirements.