15 NBFCs in RBI’s ‘upper layer scale’; will face stiffer regulations

Subject :Economy

Section: Monetary Policy

In News: RBI places 15 NBFCs in the Upper Layer (NBFC-UL) under Scale Based Regulations (SBR) for non-bank lenders.

Key Points:

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.

Why did RBI take this measure?

With many entities growing and becoming systemically significant, there was a need to align the regulatory framework for NBFCs, keeping in view their changing risk profiles. Hence, SBR has been brought in.

Scale Based Regulations (SBR)

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 judgement.
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 regulatory structure for NBFCs comprises four layers based on their size, activity, and perceived riskiness.
The four layers are:
- NBFC-Base Layer (NBFC-BL).
- NBFC-Middle
- NBFC-Upper Layer (NBFC-UL).
- NBFC-Top Layer
The Top Layer is ideally expected to be empty and will be known as the NBFC-Top Layer (NBFC-TL).