Introduction to proposes regulatory changes for NBFCs in India

22^nd Jan, 2021 Regulator Reserve Bank of India come up with Discussion Paper on the revision of the Regulatory Framework for Non-Banking Finance Companies (NBFC). The crowd on the market and supervision hurdles in addition to malpractices present in the Market, the Apex Bank issued a discussion paper for stakeholder comment within one month from date of this press release.

As per existing regulations, the Non-Banking Finance Company is of two types either Accepting Deposits or Non-Accepting Public Deposit. Accepting Deposit NBFCs are around 64 Companies and other than this, are Non-Accepting Deposit. In India, approx. 12k plus NBFC are active license Holders, out of which around 9k plus are Non-Banking Finance Companies- Investment and Credit Companies (NBFC-ICC). Other than this, there are Housing Finance Companies (HFC), Micro Finance Institutions (MFI), Mortgage Guarantee Companies (MGC), Factors, Core Investment Companies (CIC), Infrastructure Finance Companies (IFC), Infrastructure Debt Fund (IDF), Assets Reconstruction Company (ARC) and Non-Operative Financial Holding Company. On recent developments, technology-based Non-Banking Finance Companies are identified and licensed to operate, precisely Peer to Peer Lending and Account Aggregators. As we know, changes are inevitable, now on this the apex Bank come up with new framework on the discussion.

The published discussion paper at the Reserve Bank of India (Bank) website is based on “A Scale–Based Approach” instead of the existing category nature.

• Moving from Base Layer to Top Layer will be a journey of an NBFC, The entry-level NBFC be counted on Base Layer.
• Base Layer NBFC criteria cover approx. 9k existing NBFCs in India.

Under this Layer, existing NBFC categories like NBFC-ND, Peer to Peer Lending (P2P), Account Aggregator (AA), Non-Operative Financial Holding Companies (NOFHC) etc. will fall as per the criteria given under this discussion paper for revision of the regulatory framework. Up to INR 1000 Crore assets size will fall into this Category. And the entry-level requirement of the Net Owned Fund proposed is INR 20 Crore, unlike INR 2 Crore in the existing level. However, the existing NBFC has 5 years time period to reach at INR 20 Crore NOF from the date of this discussion revised regulatory framework.

• Systematically Important NBFC-ND, NBFC-D, Housing Finance Companies (HFCs), Infrastructure Finance Companies (IFCs), Infrastructure Debt Funds (IDFs) and Core Investment Companies (CICs) will be on Middle Layer as per the proposed new regulatory framework.
• Upper-level NBFCs will be regulated like Bank-like Regulation where hardly 25-30 NBFCs do fall as per existing market share. A few months back the apex Bank has issued press release for voluntary conversion into Bank from eligible NBFC but no player been interested to convert themselves into Bank which might be one probable reason for Bank to come up with this revised regulatory framework.
• Upper-level NBFC in terms of assets size has to undergo more few filtrations in terms of size, interconnections, complexity, and supervisory inputs.
• As we can see the Top-level category NBFC is not yet available in the Market as of now. And it’s been utmost cap, the space is vacant as of now. This level is primarily reserved for the supervisory discretion of the Reserve Bank of India.

Entry Level - Proposed Regulatory Framework

Base Layer: It is entry-level stage for a Non-Banking Finance Company which needs to minimum Net Owned Fund of INR 20 Crore instead of the existing limit of INR 2 Crore. The applicable regulatory framework for this will be the applicable regulatory framework that is currently applicable for NBFC-ND. However, the threshold is being increased to INR 1,000 Crore, the regulatory framework can be supplemented by enhanced governance and disclosure standards.

The existing Non-Performing Assets (NPA) classification norm of 180 days will be harmonized to 90 days.