Introduction to proposes regulatory changes for NBFCs in India

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

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

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

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

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

• Systematically Important NBFC-ND, NBFC-D, Housing Finance Company (HFCs), Infrastructure Finance Company (IFCs), Infrastructure Debt Fund (IDFs) and Core Investment Company (CICs) will be on Middle Layer as per proposed new regulatory framework.
• Upper-level NBFC will be regulated like Bank like Regulation where hardly 25-30 NBFCs do fall as per existing market share. 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, 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, inter-connections, complexity, 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 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.