Tightening the Screws

The RBI proposes tighter rules for NBFCs and wants them classified into four categories. This is crucial for fiscal steadiness and to bring back confidence and will ensure that larger players will be screened just like banks

- Shivanand Pandit

NON-BANKING Financial Companies (NBFCs), due to their magnitude, intricacy and interconnectedness, are systematically becoming important. But they are also the greatest debtors and procured more than 50 percent of their funding from scheduled commercial banks. Due to the strain in the banking sector and the interconnections between NBFCs, banks, stock markets and other monetary units, the RBI has sought to reassess NBFCs’ governing framework.

In January 2021, an RBI discussion paper called “Revised Regulatory Framework for NBFCs—a Scale-Based Approach” mentioned that the frame work could be envisaged as a pyramid. NBFCs can be classified into four categories—Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and a possible Top Layer (TL). The paper contains rules about capital requirement, concentration norms, governance rules and disclosure obligations for each layer. The RBI has recommended stringent standards and the formation of a multi-layer model to safeguard financial solidity and diminish systemic hurdles.

Although there will be minimum controlling interference for NBFCs in the Base Layer, as one goes up the pyramid, the regulatory system will get harder and stricter. The framework proposes to stipulate bank-like protocols for the top 25-30 NBFCs in India. To facilitate the NBFCs to design a plan for execution, a time-period of eight weeks will be offered. According to the RBI, within this time, the NBFCs should put in place a board-authorised strategy for implementation of the supervisory outline and they will be subject to obligatory listing requirements.