New NBFC Regulatory Regime: Scale Based Regulation Directions 2023

base layer (NBFC-BL), which includes non-deposit taking NBFCs with an asset size of less than INR 1,000 crore, NBFC P2P, NOFHCs, NBFCs not availing public funds and not having any customer interface etc.;

middle layer (NBFC-ML), which includes all deposit taking NBFCs, non-deposit taking NBFCs with asset size of INR 1,000 crore and more, HFCs, IDF NBFCs etc.;        

upper layer (NBFC-UL), which includes NBFCs which are specifically identified by the RBI; and

top layer (NBFC-TL), which will include NBFCs which the RBI shifts from the upper layer to the top layer if such NBFCs have potential systemic risk.

all references to NBFC-ND (non-systemically important non-deposit taking NBFC) would now be referred to as NBFC-BL, and all references to NBFC-D (deposit-taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) would be known as NBFC-ML or NBFC-UL, as applicable; and

existing systemically important non-deposit taking NBFCs with an asset size of INR 500 crore and above but below INR 1,000 crore (except those necessarily categorized as NBFC-ML) would be reclassified as NBFC-BL.

Base Layer:

All existing non-systemically important NBFCs and systemically important NBFCs with an asset size of less than INR 1,000 crore are now categorised as NBFCs-BL. Set out below are the key regulatory changes which were earlier applicable to NBFCs having an asset size between INR 500 crore and INR 1,000 crore, and are now no longer be applicable to such NBFCs as these NBFCs will be classified as NBFCs-BL:

Asset classification: Under the Erstwhile Regulatory Regime, non-systemically important NBFCs were required to classify their assets differently than systemically important NBFCs. While systemically important NBFCs were on par with banks (with a NPA classification to be made once an asset had remained overdue for more than 90 days), non-systemically important NBFCs were required to classify an asset as an NPA once it had remained overdue for more than 6 months. Under the SBR Master Directions, the NPA classification norm applicable to all NBFCs-BL (including formerly non-systemically important NBFCs) stands changed to the overdue period of more than 90 days. While the SBR Master Directions have come into effect from the date of their publication, the RBI has prescribed a glide path to NBFCs-BL in relation to this requirement, as follows:

NPA NORMS

TIMELINE

>150 days overdue

by 31 March 2024

>120 days overdue

by 31 March 2025

>90 days overdue

by 31 March 2026

Credit concentration norms: Under the Erstwhile Regulatory Regime, systemically important NBFCs were required to comply with specified concentration norms for lending and investment. This has now been done away with for NBFCs-BL, and existing systemically important NBFCs that are NBFC-BL, no longer have to comply with this requirement.

Capital adequacy ratio: Under the Erstwhile Regulatory Regime, systemically important NBFCs were required to maintain a minimum capital ratio of Tier I and Tier II Capital not less than 15% of its aggregate risk weighted assets. This requirement has now been done away with for NBFCs-BL and is only applicable to NBFCs-ML and NBFCs-UL. Accordingly, existing systemically important NBFCs that are NBFC-BL no longer have to comply with this requirement.

Tier I Capital and Tier II Capital: NBFCs-BL are not eligible to categorise perpetual debt instruments as part of their Tier I Capital and Tier II Capital. Perpetual debt instruments issued by systemically important NBFCs earlier formed part of their Tier I Capital and Tier II Capital.

Dividend declaration: NBFCs-BL are now exempt from reporting details of dividend declared during a financial year, a requirement which was earlier applicable to systemically important NBFCs.

Corporate governance: Certain board committees such as an audit committee and nomination and remuneration committee which were earlier required to be constituted by systemically important NBFCs are no longer required to be constituted by NBFCs-BL. Other requirements such as fit and proper criteria for directors and appointment of a chief risk officer are also no longer required to be complied with by NBFCs-BL.

INR 500 crore distinction: While the categorisation of NBFCs on INR 500 crore threshold has been phased out, this threshold has been explicitly mentioned for certain compliances. For example, all non-deposit taking NBFCs above the asset size of INR 500 crore (as well as all deposit taking NBFCs) irrespective of asset size, have to continue to follow the instructions set out in the RBI circular titled ‘The Prudential Framework for Resolution of Stressed Assets’ dated 07 June 2019.

Middle Layer:

All non-deposit taking NBFCs with asset size of INR 1,000 crore and above (unless otherwise stated) have been re-classified as NBFC-ML and all the compliances applicable for NBFC-BL as set out in Paragraph (i) above will be applicable to such NBFCs-ML, over and above the specific regulatory compliances applicable to NBFCs-ML. Such additional compliances applicable to NBFCs-ML include inter alia a capital adequacy ratio of 15%, an internal capital adequacy assessment process, disclosures to be made in financial statements, credit concentration norms, enhanced corporate governance requirements and regulatory restrictions on loans. To clarify, these compliance requirements are also applicable to NBFCs-UL, but are not applicable to NBFCs-BL

Upper Layer:

All directions prescribed in the context of each of NBFCs-BL and NBFCs-ML shall remain applicable to an NBFC-UL, unless specified otherwise.

The SBR Master Directions have consolidated all requirements in relation to an NBFC-UL that were prescribed during the course of 2021 and 2022, on prudential regulations, differential standard asset provisioning, large exposures framework, governance guidelines, and listing requirements. The transition path for NBFCs-UL also remains the same as what was prescribed under the SBR Framework.

The SBR Framework had prescribed that NBFC-UL will also be subjected to leverage requirement to ensure that their growth is supported by adequate capital, among other factors. The ceiling for leverage for these entities is still awaited and has not been prescribed in the SBR Master Directions.

Top Layer:

There has been no specific change in the regulations applicable to NBFCs-TL. While NBFCs-TL shall continue to abide by the applicable regulations (prescribed in context of each of NBFC-BL, NBFC-ML, and NBFC-UL), they shall be subject to higher capital charge, which shall be specifically communicated to the NBFC-TL at the time of its classification in the top layer.