REGULATORY FRAMEWORK FOR NBFCs

REGULATORY FRAMEWORK FOR NBFCs

Subject : Economy

Context : The Reserve Bank of India (RBI) plans to usher in a four-layered regulatory and supervisory framework for non-banking finance NBFCs as it embarks on the path of a scale-based regulation in the backdrop of the recent stress in the sector.

Concept :

• RBI said its proposed framework could be visualised as a pyramid, comprising NBFCs grouped in four layers — Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and a possible Top Layer (TL).
• There will be least regulatory intervention for NBFCs in BL. As one moves up the pyramid, the regulatory regime will get stricter.
• The framework proposes to prescribe Bank-like regulations for the top 25 to 30 NBFCs in the country.

Difference between NBFC and Banks :

• NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences. Unlike banks ,
• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
• Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government, RBI and NABARD.
• The norm of Public Sector Lending does not apply to NBFCs.
• The Cash Reserve Requirement also does not apply to NBFCs.

Systemically important NBFCs

• Systemically important NBFCs are those with an asset size of Rs 500 crore or more.
• NBFCs-ND are categorized into two broad categories viz.,

1. NBFCs-ND (those with assets of less than Rs. 500 crore) and
2. NBFCs-ND-SI (those with assets of Rs. 500 crore and above).

(ND mean Non-Deposit taking NBFCs)

• For Systemically Important Core Investment Companies (NBFC -CIC- SI), the asset size is Rs 100 crore.