4-tier structure for regulation of NBFCs

Why in News?

Reserve Bank of India (RBI) has proposed a tighter regulatory framework for non-banking financial companies (NBFCs) by creating a four-tier structure. The intensity of regulations will be greatest at the top layer and lowest at the base layer.

Objective: It is to keep the big NBFCs in good financial health. It has become important after the failure of extremely large NBFC like IL&FS.

Four Tier Structure:

Base layer: This layer will include the large number of small NBFCs in the country and will subject to the least regulation. It is because they have a limited impact on systemic stability. The proposals for this set of NBFCs include:

  • Entry-level net owned funds required to be raised to Rs 20 crore from Rs 2 crore.
  • NPA classification norm of 180 days will be harmonized to 90 days.
  • Disclosure requirements will be widened by including disclosures on types of exposure, related party transactions, customer complaints.

Middle Layer: It will consist of NBFCs that currently fall in the ‘systemically important’ category along with deposit-taking non-bank lenders. Housing Finance Companies, Infrastructure Finance Companies, Infrastructure Debt Funds, Core Investment Companies. The proposals for this set of NBFCs include:

  • It will be subjected to tighter corporate governance norms.
  • No changes proposed in the capital-to-risk-assets ratio (CRAR) of 15% with a minimum Tier-I ratio of 10%.
  • These NBFCs cannot provide loans to companies for buy-back of securities.
  • NBFCs with 10 or more branches will be required to adopt core banking solutions.

Upper Layer: It will include about 25-30 NBFCs and will be subjected to bank-like regulation.

  • It will have to implement differential standard asset provisioning and also the large exposure framework as applicable to banks.
  • The concept of Core Equity Tier-1 will be introduced for this category and is proposed to be set at 9%.
  • They will also be subject to a mandatory listing requirement.

Top Layer: This layer will be empty for now and will be populated with NBFCs, where the RBI may see an elevated systemic risk.

Source: Indian Express

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