RBI Announces Revised Regulatory Framework for NBFCs

Last Updated On: Oct. 25, 2021, 9:40 p.m.
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RBI ANNOUNCES A REVISED REGULATORY FRAMEWORK FOR NSFCs

 

What is a Non-Banking Financial Company (NBFC)?

 

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

 

 

What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

  • 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.

 

 

REVISION OF REGULATORY FRAMEWORK FOR NBFCs

The Reserve Bank of India (RBI) has introduced a revised scale-based regulatory framework for non-banking financial companies (NBFCs), which will be effective from 1 October, 2022.

The scale-based framework encompasses different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, and others.

The regulatory structure for NBFCs will comprise of four layers based on their size, activity, and perceived riskiness.

NBFCs in the lowest layer will be known as NBFC - Base Layer (NBFC-BL), while those in the middle layer and upper layer will be known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively.

The top ten eligible NBFCs in terms of their asset size will always reside in the upper layer, irrespective of any other factor.

Under the new framework, the RBI has tweaked the non-performing asset (NPA) classification to more than 90 days for all categories of NBFCs.

When it comes to the experience of the Board, considering the need for professional experience in managing the affairs of NBFCs, at least one of the directors must have relevant experience of having worked in a bank/ NBFC.

Further, there will also be a ceiling of ₹1 crore per borrower for financing subscription to Initial Public Offer (IPO). NBFCs can fix more conservative limits, the Central bank said in a statement.

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