February 3, 2022

Transition to New Scale Base Regulatory Framework for NBFC

Non-Banking Financial Institutions (“NBFC”) is a company registered under the Companies Act that is involved in Financing businesses such as Loans and Advances, Leasing, hire-purchase, etc. The role of NBFC has enhanced considerably in the Indian economy and various sectors are obtaining financial services from NBFC.

Therefore, gradually the Reserve Bank of India (“RBI”) is also increasing its supervision over NBFC so that NBFC functions under a regulatory framework. In this line, RBI has notified an all-together new Scale Based Regulatory (“SBR”) framework for NBFC vide Notification No. RBI/2021-22/112 DOR.CRE.REC.No.60/03.10.001/2021-22 dated 22nd October 2021.

In this article, a detailed discussion has been carried out for the transition to a new regulatory framework.

1. Current Categorisation Vs. New Categorisation

1.1. Current Categorisation

Presently, NBFCs are categorisation on basis of:
- Type of liabilities and size of assets of the NBFC; and
- Nature of activities undertaken by NBFC

On the basis of type of liabilities, NBFCs are classified as:
- deposit-accepting NBFCs (NBFC-D) and
- non-deposit accepting NBFCs.

Further, based on size of asset, non-deposit accepting NBFCs are further classified into systemically important NBFCs having an asset size of more than INR 500 crores (NBFC-ND-SI) and non-systemically important NBFCs having an asset size of less than INR 500 crores (NBFC-ND).

Also, NBFCs fall under different categories based on the nature of activities. Few illustrative NBFC classification based on nature of activities are:

Nature of business activity	Classification of NBFC
Lending, asset financing, and investments	Investment and credit companies (NBFCICC)
Microfinance business	Microfinance institution (NBFC-MFI)
Housing finance business	Housing finance companies (HFC)

1.2. Revised Categorisation under SBR Framework

Under SBR Framework, NBFC are categorized under following four layers:
- Base Layer
- Middle Layer
- Upper Layer
- Top Layer

Classification under the new framework is made considering both size of assets and nature of business. High risk NBFCs are also identified through various quantitative and qualitative parameters.

2. Applicability of new regulatory framework

As per notification, the new regulatory framework shall become effective from 1st October, 2022.
However, ceiling of INR 1 Crore per borrower for financing subscription to IPO shall become applicable from 01.04.2022.
With Effect from 01.10.2022, all references to NBFC-ND shall mean NBFC-BL and all references to NBFC-D and NBFC-ND-SI shall mean NBFC-ML or NBFC-UL, as the case may be.

3. Transition to New Regulatory Framework

RBI has provided a following map of transition to the new SBR Framework:

3.1. Minimum Net Owned Funds

Regulatory requirement of minimum Net owned funds (“NOF”) has been enhanced from 2 Crores to 10 Crores for NBFC-CCI, NBFC-MFI and MBFC-Factors.
However, following guideline path is provided to achieve NOF of INR 10 Crores:

NBFCs	Current Minimum NOF required	By March 31, 2025	By March 31, 2027
NBFC-ICC	2 Crores	5 Crores	10 Crores
NBFC-MFI	5 Crores (2 Crores in North-East Region)	7 Crores (5 Crores in North East Region)	10 Crores
NBFC-Factors	5 Crores	7 Crores	10 Crores

NOF requirements for other NBFCs shall continue to remain the same.

3.2. NPA Classification

Under new SBR Framework, time period classification of Non-performing assets has been reduced to 90 days for all categories of NBFCs. However, such provision shall not immediately.
Following is the framework provided for applicability of revised NPA Norms:

NPA Norms	Timelines
>150 days overdue	By March 31, 2024
>120 days overdue	By March 31, 2026
> 90 Days overdue	By March 31, 2027

However, such glide path will not be applicable to NBFCs which are already required to follow the 90-day NPA norm.

3.3. Transition path for NBFC-Upper Layer

Norms for NBFCs falling under Base Layer and Upper Layer are mostly the same as applicable currently except for some changes such as Net Owned funds and NPA classification.

Therefore, the transition path is provided for NBFC falling under Upper Layer.

RBI shall advise the NBFC about its categorization under NBFC-UL once identified and such NBFC shall be placed under the regulations applicable to Upper Layer. The following timetables must be followed for this purpose:
- Within three months of receiving notice, the NBFC must establish a Board-approved policy for the adoption of the increased regulatory framework, as well as a strategy for its implementation.
- Within a maximum of 24 months (including above 3 months) from the date of advice, the Board shall ensure that the requirements provided for the NBFC-UL are followed.
- The Board-approved roadmap for implementing the enhanced regulatory requirement will be presented to the Reserve Bank for approval and will be subject to supervisory examination.

Transition of NBFC to the Upper Layer
- Once an NBFC is classified as NBFC-UL, it is subject to stricter regulatory requirements for at least 5 years, even if it fails to meet the parametric criteria in succeeding years.
- However, NBFC-UL may exit the enhanced regulatory framework before the five-year period if the exit is due to a voluntary strategic move to recalibrate operations in accordance with a Board-approved policy.
- NBFCs that are on the verge of meeting the standards and benchmarks that would qualify them for NBFC-UL classification will be notified so that they can adapt their activities (In case they intend to continue to function as NBFC-ML on a long-term basis and do not want to graduate to NBFC-UL).

Review of Assessment Methodology

The approach for evaluating the NBFC-UL will be evaluated on a regular basis.

3.4. Government-owned NBFCs are divided into four categories.

Government-owned NBFCs are still in the transition phase to meet the minimal CRAR, according to the Reserve Bank’s circular on ‘Withdrawal of Exemptions Granted to Government-Owned NBFCs’ dated May 31, 2018. As a result, it has been decided that certain NBFCs will not be subjected to the Upper Layer regulatory framework at this time. A decision on whether to include qualifying Government NBFCs that match the stipulated requirements in the Upper Layer will be made at a later date, and in the meantime, the NBFC-ML guidelines will apply.

3.5. Regulation of NBFCs not availing public funds and not having customer interface

NBFCs that do not use public funds and do not have a client interface have a different risk profile and, as a result, should be treated differently by regulators. The Reserve Bank has decided to provide separate regulations for such NBFCs in the near future. The existing regulations will continue to apply until that time comes.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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