The Reserve Bank of India (RBI) has zeroed in on 15 non-banking finance companies (NBFCs), including LIC Housing Finance, Bajaj Finance, Shriram Finance, Tata Sons, and Cholamandalam Investment and Finance Company, placing them in the Upper Layer (NBFC-UL) under Scale Based Regulations (SBR) for non-bank lenders.
These NBFCs, which belong to various categories — deposit-taking housing finance companies (HFC), non-deposit-taking HFC, deposit-taking NBFC-ICC (Investment and Credit Company), Non-deposit-taking NBFC-ICC, and core investment companies — will be subject to enhanced regulatory requirements, at least for a period of five years from their classification in the layer, even in case they do not meet the parametric criteria in the subsequent year/s, as per a RBI statement.
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‘Need for alignment’
With many entities growing and becoming systemically significant, the RBI said there is a need to align the regulatory framework for NBFCs, keeping in view their changing risk profiles. Hence, SBR has been brought in. It encompasses different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, etc.
Under the SBR, the upper layer will be populated with NBFCs, identified via a parametric scoring methodology comprising quantitative and qualitative parameters and supervisory judgment.
The parametric scoring methodology takes into account parameters such as size and leverage, interconnectedness, complexity, nature and type of liabilities, group structure, and segment penetration.
The other NBFCs that are on RBI’s 2023-24 list of NBFC-UL are: HDB Financial Services, Aditya Birla Finance, Mahindra & Mahindra Financial Services, Muthoot Finance, L&T Finance, Piramal Capital & Housing Finance, Tata Capital Financial Services, PNB Housing Finance, Indiabulls Housing Finance, and Bajaj Housing Finance.
The central bank said despite qualifying for identification as an NBFC-UL as per scoring methodology, TMF Business Services Limited (formerly Tata Motors Finance Limited) is not being included in the list of NBFC-UL in the current review due to its ongoing business reorganisation.
The regulatory structure for NBFCs comprises four layers based on their size, activity, and perceived riskiness. NBFCs in the lowest layer will be known as NBFC-Base Layer (NBFC-BL). NBFCs in the middle layer and upper layer will be known as NBFC-Middle Layer (NBFC-ML) and NBFC-Upper Layer (NBFC-UL), respectively. The Top Layer is ideally expected to be empty and will be known as the NBFC-Top Layer (NBFC-TL).