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TMI BlogScale Based Regulation (SBR): A Revised Regulatory Framework for NBFCsX X X X Extracts X X X X X X X X Extracts X X X X ..... k for NBFCs (Annex). 3. As the SBR framework encompasses different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, etc., it has been decided to first issue an integrated regulatory framework for NBFCs under SBR providing a holistic view of the SBR structure, set of fresh regulations being introduced and respective timelines. Detailed guidelines as delineated in the Annex, will be issued subsequently. 4. These guidelines shall be effective from October 01, 2022. The instructions relating to ceiling on IPO funding given vide para 3.1(d) of the Annex shall come into effect from April 01, 2022. Yours faithfully, (Manoranjan Mishra) Chief General Manager Annex Framework for Scale Based Regulation for Non-Banking Financial Companies Section I 1. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtgage Guarantee Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework. Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case may be. They will not be placed in the Upper Layer till further notice. Section II 2. Scale Based Regulatory Framework 2.1 References to NBFC-ND, NBFC-ND-SI NBFC-D - From October 01, 2022, all references to NBFC-ND shall mean NBFC-BL and all references to NBFC-D and NBFC-ND-SI shall mean NBFC-ML or NBFC-UL, as the case may be 2 . 2.2 Progressive application of regulations - Regulatory revisions applicable to lower layers of NBFCs will automatically be applicable to NBFCs residing in higher layers, unless stated otherwise. 2.3 Regulatory guidelines for NBFCs in Base Layer - NBFCs in the Base Layer (NBFC-BL) shall be subject to regulations as currently applicable to NBFC-ND, except for the changes mentioned below at paras 3.1 and 3.2. NBFC-P2P, NBFC-AA, and NOFHC shall be subject to extant regulations governing them 3 . 2.4 Regulatory guidelines for NBFCs in Middle Layer - NBFCs in the Middle Layer (NBFC-ML) shall continue to follow reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a thorough internal assessment of the need for capital, commensurate with the risks in their business. This internal assessment shall be on similar lines as ICAAP prescribed for commercial banks under Pillar 2 (Master Circular Basel III Capital Regulations dated July 01, 2015). While Pillar 2 capital will not be insisted upon, NBFCs are required to make a realistic assessment of risks. Internal capital assessment shall factor in credit risk, market risk, operational risk and all other residual risks as per methodology to be determined internally. The methodology for internal assessment of capital shall be proportionate to the scale and complexity of operations as per their Board approved policy. The objective of ICAAP is to ensure availability of adequate capital to support all risks in business as also to encourage NBFCs to develop and use better internal risk management techniques for monitoring and managing their risks. This will facilitate an active dialogue between the supervisors and NBFCs on the assessment of risks and monitoring as well as mitigation of the same. Additional regulatory changes under SBR applicable to NBFC-UL b) Common Equity Tier 1 In order to enhance the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r financing land acquisition. Ceiling on IPO Funding as mentioned at Para 3.1. Housing Finance Companies shall continue to follow specific regulation on sensitive sector exposure, as are currently applicable in terms of paragraph 22 7 23 8 of Master Direction Non-Banking Financial Company Housing Finance Company (Reserve Bank) Directions, 2021. c) Regulatory restrictions on loans NBFCs shall be subject to regulatory restrictions in respect of the following: Granting loans and advances to directors, their relatives and to entities where directors or their relatives have major shareholding. Granting loans and advances to Senior Officers of the NBFC. While appraising loan proposals involving real estate, NBFCs shall ensure that the borrowers have obtained prior permission from government / local governments / other statutory authorities for the project, wherever required. To ensure that the loan approval process is not hampered on account of this, while the proposals could be sanctioned in normal course, the disbursements shall be made only after the borrower has obtained requisite clearances from the government authorities. A detailed circular on the areas mentioned at para c above w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013, an independent director shall not be on the Board of more than three NBFCs (NBFC-ML or NBFC-UL) at the same time. Further, the Board of the NBFC shall ensure that there is no conflict arising out of their independent directors being on the Board of another NBFC at the same time. A timeline of two years is provided with effect from October 01, 2022 to ensure compliance with these norms. There shall be no restriction to directorship on the Boards of NBFC-BLs, subject to applicable provisions of Companies Act, 2013. f) Disclosures - NBFCs shall, in addition to the existing regulatory disclosures, disclose the following in their Annual Financial Statements, with effect from March 31, 2023: Corporate Governance report containing composition and category of directors, shareholding of non-executive directors, etc. Disclosure on modified opinion, if any, expressed by auditors, its impact on various financial items and views of management on audit qualifications. Items of income and expenditure of exceptional nature. Breaches in terms of covenants in respect of loans availed by the NBFC or debt securities issued by the NBFC including incidence/s of default. Divergence in asset classifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put in place on the same lines as applicable to a listed company even before the actual listing, as per Board approved policy of the NBFC. m) Removal of Independent Directors NBFC-UL shall be required to report to the supervisors in case any Independent Director is removed/ resigns before completion of his normal tenure. 3.3 Regulatory guidelines for NBFCs under Top Layer NBFCs falling in the Top Layer of the regulatory structure shall, inter alia, be subject to higher capital charge. Such higher requirements shall be specifically communicated to the NBFC at the time of its classification in the Top Layer. There will be enhanced and intensive supervisory engagement with these NBFCs. Section III 4. Transition Path 4.1 Transition Plan - Once a NBFC is identified for inclusion as NBFC-UL, the NBFC shall be advised about its classification by the Department of Regulation, Reserve Bank and it will be placed under regulation applicable to the Upper Layer. For this purpose, the following timelines shall be adhered to: Within 3 months of being advised by the RBI regarding its inclusion in the NBFC-UL, the NBFC shall put in place a Board approved policy for adoption of the enhanced regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. A decision on including eligible Government NBFCs meeting the specified criteria into the Upper Layer will be taken at a later stage and till that time the guidelines as applicable for the NBFC-ML shall apply. 4.5 Regulation of NBFCs not availing public funds and not having customer interface - NBFCs not availing public funds and not having customer interface bear a different risk profile and hence deserve a differential regulatory treatment. It has been decided that Reserve Bank will come out with separate regulations for such NBFCs in due course. Till such time, the extant regulations will continue to apply. ---- 1 Public Funds and Customer Interface as defined in Master Direction on Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 dated September 01, 2016 2 It is clarified that existing NBFC-ND-SIs having asset size of ₹500 crore and above but below ₹1000 crore (except those necessarily featuring in Middle Layer) will be known as NBFC-BL. 3 Master Directions - Non-Banking Financial Company Peer to Peer Lending Platform (Reserve Bank) Directions, 2017; Master Direction- N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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