RBI suggests a tougher regulatory framework for NBFCs

RBI suggests a tougher regulatory framework for NBFCs

Part of: GS Prelims and GS- III – Banking; Economy

In news 

• The RBI has suggested a tougher regulatory framework for the non-banking finance companies’ (NBFC) sector to prevent recurrence of any systemic risk to the country’s financial system.

Key takeaways

• RBI released a discussion paper on the revised regulatory framework which is formulated on a scale-based approach, and sought comments within a month.
• The regulatory and supervisory framework of NBFCs will be based on a four-layered structure — the base layer (NBFC-BL), middle layer (NBFC-ML), upper layer (NBFC-UL) and the top layer.
• If the framework is visualised as a pyramid, the bottom of the pyramid, where least regulatory intervention is warranted, can consist of NBFCs currently classified as non-systemically important NBFCs (NBFC-ND), NBFCP2P lending platforms, NBFCAA, NOFHC and Type I NBFCs.
• The next layer may comprise NBFCs currently classified as systemically important NBFCs (NBFC-ND-SI), deposit-taking NBFCs (NBFC-D), HFCs, IFCs, IDFs, SPDs and CICs.
• The extant regulatory framework for NBFC-NDs will now be applicable to base layer NBFCs. 
• The extant regulatory framework applicable for NBFC-NDSI will be applicable to middle layer NBFCs. 
• NBFCs residing in the upper layer will constitute a new category.
• The current threshold for systemic importance, which is ₹500 crore now, is proposed to be revised to ₹1,000 crore.
• As per the proposals, the extant NPA classification norm of 180 days will be reduced to 90 days.

Important value additions 

Non-Banking Financial Company

• It is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. 
• The most important difference between non-banking financial companies and banks is that NBFCs don’t take demand deposits.  

Related articles:

• RBI introduces risk-based internal audit norms for NBFCs, UCBs: Click here
• Structured Finance and Partial Guarantee Programme to NBFC-MFIs launched: Click here
• Special liquidity scheme for NBFCs/HFCs approved: Click here