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Reserve Bank of India proposes a multilayer structure for stricter regulation of NBFCs


Last Updated on 17/10/2021 by Aish K

Reserve Bank of India proposes a multilayer structure for stricter regulation of NBFCs 1
(Image Courtesy : entrackr.com)

 As per a discussion paper by RBI on Friday, India is in need of a tighter regulatory framework for the non-banking finance companies (NBFC). This can be fulfilled by a multilayer model structure.

The paper entailed a proposition for categorising NBFCs, or shadow banks, on the basis of their size and link with the system. The lower level NBFCs would be called NBFC-Base Layer. NBFCs that of the middle layer would be known as NBFC-Middle Layer and the ones in the upper layer would be termed NBFC-Upper Layer. This will initiate a new regulatory super-structure.

A proposal of changing the classification of a non-performing NBFC from 180 days to 90 days, has been put forward. “In view of the recent stress in the sector, it has become imperative to re-examine the suitability of this regulatory approach, especially when failure of an extremely large NBFC can precipitate systemic risks,” statements from the paper.

A limit of 25-30 has been set for the number of large non-bank lenders that will be part of the upper segment of the pyramid. The upper tier constituents could be companies like that of Housing Development Finance Corp. (HDFC),  Tata Capital, Bajaj Finance,Shriram Capital, and Mahindra and Mahindra Financial Services. 

NBFCs will not be categorised in the top layer of the pyramid unless and until the risk engaged increases to an acute level.

The layer can get populated in case the Reserve Bank takes a view that there has been an unsustainable increase in the systemic risk spill-overs from specific NBFCs in the Upper Layer,” as per the paper. “NBFCs in this layer will be subject to higher capital charge, including Capital Conservation Buffers.

It is felt that CET 1 could be introduced for NBFC-UL to enhance the quality of regulatory framework for NBFC-upper layer to greater sensitivity, it is suggested that they are prescribed differential standard asset provisioning on lines of banks.”

A common equity tier-1 capital requirement has been proposed of up to 9% for the NBFCs of the upper segment. Furthermore, it stated formation of similar standard asset provision norms. Entry norms have been suggested to be made tighter by setting up a minimum net owned funds value of Rs. 20 crore, from it’s pertaining value of Rs. 2 crores.

Khushi is an avid reader and loves analyzing companies in the digital space. Her interest is in online marketing, business, startups, and politics. She does everything perfectly by taking extra time.
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