Applicability of RBI Scale based Regulations to NBFCs
For NBFCs, RBI Scale based Regulations have taken effect since 01st October 2022. Well there are some ambiguity per se in general regarding Base layer, Middle Layer and Upper layer with respect to Individual Asset Size and Group Asset size of NBFC. Lets try to understand and unfold the same:
REGULATORY STRUCTURE FOR NBFCS
1.1 Regulatory structure for NBFCs shall comprise of four layers based on their size, activity and perceived riskiness. NBFCs in the lowest layer shall be known as NBFC – Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be known as NBFC – Middle Layer (NBFC-ML) and NBFC – Upper Layer (NBFC-UL) respectively. The Top Layer is ideally expected to be empty and will be known as NBFC – Top Layer (NBFC-TL).
1.2 The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1000 crore and (b) NBFCs undertaking the following activities- (i) NBFC-Peer to Peer Lending Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface1.
1.3 The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ₹1000 crore and above and (c)NBFCs undertaking the following activities (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs).
1.4 The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology as provided in the Appendix to this circular. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
1.5 The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.
Well the issue that can arises are:
i. NBFC having asset size of Rs 90 Cr having access to Public Fund of 25 cr , though group asset size is 1520 cr.
ii. NBFC having asset size of Rs 510 Cr having Nil access to Public Fund , though group asset size is 1050 cr.
iii. NBFC having asset size of 1200 cr having Nil access to public fund and Customer Interface , no group Company exist.
1. Assuming All NBFCs specified in illustration above are NON-DEPOSIT TAKING. All Deposit Taking NBFCs irrespective of Asset size falls into Middle Layer.
2. “Public funds” includes funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures etc. but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue.
3. None of the NBFCs are CIC (Core Investment Company).
i.) NBFC having asset size of Rs 90 Cr having access to Public Fund of 25 cr , though group asset size is 1520 cr : Although Singly , NBFC is far below the limit of 1000 Cr Asset size , but due to group classification , it will fall into Middle layer , as it access to public fund and RBI Master Direction for Systematically Important regulations shall apply to it.
ii) NBFC having asset size of Rs 510 Cr having Nil access to Public Fund , though group asset size is 1050 cr : Although Singly and group wise , NBFC is above the limit of 500 Cr Asset size , it will fall into Base layer , as it do not access to public fund and RBI Master Direction for Non- Systematically Important NBFCs regulations shall apply to it.
iii. NBFC having asset size of 1200 cr having Nil access to public Fund and Customer Interface, no group Company exist: Though NBFC is above the limit of 1000 Cr Asset size, it will fall into Base layer, as it do not access to public fund and Customer Interference.
It is very important for a Group to find out first whether your Company is a CIC or not then one should plan to classify and pursue compliance for it , otherwise it will be too late to rectify the default.
I have tried to simplify the interpretation of the RBI Circular from my perspective , how you find it meaningful and prudent.