RBI proposes 4-tier construction for tighter regulation of NBFCs

The Reserve Bank of India (RBI) has proposed a tighter regulatory framework for non-banking monetary firms (NBFCs) by making a four-tier construction with a progressive improve in depth of regulation.
In its dialogue paper on revised regulatory framework for NBFCs, the RBI has stated the regulatory and supervisory framework of NBFCs needs to be based mostly on a four-layered construction: Base Layer, Middle Layer, Upper Layer and a attainable Top Layer. It has additionally proposed classification of non-performing belongings (NPAs) of base layer NBFCs from 180 days to 90 days overdue. NBFCs in decrease layer might be generally known as NBFC-Base Layer (NBFC-BL). NBFCs in center layer might be generally known as NBFC-Middle Layer (NBFC-ML). An NBFC within the Upper Layer might be generally known as NBFC-Upper Layer (NBFC-UL) and can invite a brand new regulatory superstructure. There can be a Top Layer, ideally purported to be empty.
Once an NBFC is recognized as NBFC-UL, it is going to be topic to enhanced regulatory requirement not less than for 4 years from its final look within the class, even the place it doesn’t meet the parametric standards within the subsequent yr. “Hence, 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,” it stated. The NBFC sector has seen great development in recent times. In final 5 years alone, dimension of steadiness sheet of NBFCs (together with HFCs) has greater than doubled from Rs 20.72 lakh crore (2015) to Rs 49.22 lakh crore (2020).

The RBI paper stated regulatory framework anchored on proportionality may be launched.
BASE LAYER: If the framework is visualised as a pyramid, the underside of the pyramid, the place least regulatory intervention is warranted, can include NBFCs, presently labeled as non-systemically necessary NBFCs (NBFC-ND), NBFCP2P lending platforms, NBFCAA, NOFHC and Type I NBFCs.
MIDDLE LAYER: As one strikes up, the subsequent layer can include NBFCs presently labeled as systemically necessary NBFCs (NBFC-ND-SI), deposit taking NBFCs (NBFC-D), housing finance firms, IFCs, IDFs, SPDs and core funding firms. The regulatory regime for this layer might be stricter in comparison with the bottom layer. Adverse regulatory arbitrage vis-à-vis banks may be addressed for NBFCs falling on this layer with the intention to cut back systemic danger spill-overs, the place required, the RBI stated.
UPPER LAYER: Going additional, the subsequent layer can include NBFCs that are recognized as systemically vital amongst. This layer might be populated by NBFCs which have giant potential of systemic spill-over of dangers and have the power to impression monetary stability. There is not any parallel for this layer at current, as this might be a brand new layer for regulation. The regulatory framework for NBFCs falling on this layer might be bank-like, albeit with appropriate and acceptable modifications, it stated.
TOP LAYER: It is feasible that thought-about supervisory judgment may push some NBFCs from out of the higher layer of the systemically vital NBFCs for larger regulation/supervision. These NBFCs will occupy the highest of the higher layer as a definite set. Ideally, this high layer of the pyramid will stay empty except supervisors take a view on particular NBFCs. In different phrases, if sure NBFCs mendacity within the higher layer are seen to pose excessive dangers as per supervisory judgement, they are often put to larger and bespoke regulatory/supervisory necessities, it stated.
In view of the current stress within the sector, it has develop into crucial to re-examine the suitability of this regulatory method, particularly when failure of an especially giant NBFC can precipitate systemic dangers, the RBI paper stated. The regulatory framework for NBFCs must be reoriented to maintain tempo with altering realities within the monetary sector, it stated.