The Reserve Bank of India (RBI) plans to implement a stricter regulatory framework for Non-Banking Financial Companies (NBFCs). It plans to develop a four-tier structure with progressive, increased regulation. The RBI’s new approach also includes changing the classification of Non-Performing Assets (NPAs) of base layer NBFCs from 180 days overdue to 90 days. This follows measures introduced last year aimed at supporting NBFC liquidity.
The Department of Non-Banking Supervision
The Department of Non-Banking Supervision (DNBS) within RBI is responsible for the regulation and supervision of NBFCs under the provisions of Chapters III B and C and Chapter V of the Reserve Bank of India Act, 1934. Its responsibilities include registering NBFCs, overseeing different NBFC categories, directing deposit acceptance by NBFCs, and conducting off-site and on-site supervisions. NBFCs that take deposits and systemically important non-deposit accepting companies experience more intense regulation and supervision. The DNBS focuses on depositor protection, consumer protection and maintaining financial stability.
RBI’s Proposed Framework Aim
The goal of the proposed framework is to protect financial stability whilst ensuring smaller NBFCs remain subject to lighter regulations, encouraging growth.
Proposed Classification of NBFC
The new framework suggests the following four-tiered structure:
– Base Layer: Least regulated NBFCs, known as NBFC-Base Layer (NBFC-BL).
– Middle Layer: Moderately regulated NBFCs, known as NBFC-Middle Layer (NBFC-ML).
– Upper Layer: Highly regulated NBFCs, known as NBFC-Upper Layer (NBFC-UL), impacting financial stability.
– Top Layer: Extremely regulated NBFCs posing extreme risks according to supervisory judgement.
About Non-Banking Financial Companies (NBFC)
A NBFC is a company registered under the Companies Act, 1956, providing loans and advances, acquiring shares/stocks/bonds/debentures/securities or engaging in leasing, hire-purchase, insurance business, chit business. NBFCs do not include institutions with a principal business of agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and selling/purchasing/constructing immovable property.
A non-banking institution, which is a company and has the principal business of receiving deposits in one lump sum or in installments by way of contributions or otherwise, also qualifies as a non-banking financial company.
Features of NBFCs
NBFCs cannot accept demand deposits or issue cheques. They are not part of the payment and settlement system. Additionally, depositors at NBFCs do not have access to the deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation.