What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 or Companies Act, 2013, and engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/ debentures/ securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, etc., as their principal business. Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets (netted off by intangible assets) and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria needs to get registered as NBFC with the Reserve Bank of India (RBI).
What are the different types/categories of NBFCs registered with the RBI?
NBFCs are categorized in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs and in terms of regulatory structure of NBFCs under Scale Based Regulation into NBFC-Base Layer, NBFC-Middle Layer, NBFC-Upper Layer, and NBFC-Top Layer.
How an NBFC is categorized as NBFC-Upper Layer?
The NBFCs Upper Layer (NBFCs-UL) category comprises of those NBFCs which are specifically identified by the RBI as warranting enhanced regulatory requirement based on the set of parameters and scoring methodology. The scoring methodology comprises of quantitative and qualitative parameters which have weightage of 70 per cent and 30 per cent respectively and include aspects such as Total exposure (on and off-balance sheet) and Leverage (total debt to total equity), borrowings from financial institutions, the importance of an NBFC as a source of credit to a specific segment or area, among others. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
What happens once a NBFC is identified for inclusion as NBFC-UL?
Once an NBFC is identified for inclusion as NBFC-UL, the NBFC shall be advised about its classification by the Department of Regulation, the Reserve Bank and it will be placed under regulation applicable to the Upper Layer and it has to adhere to a prescribed time line. Within three months of being advised by the Reserve Bank regarding its inclusion in the NBFC-UL, the NBFC shall put in place a Board approved policy for adoption of the enhanced regulatory framework and chart out an implementation plan for adhering to the new set of regulations. The respective NBFC board shall ensure that the stipulations prescribed for the NBFC-UL are adhered to within a maximum time-period of 24 months from the date of advice regarding classification as an NBFC-UL. During the period of transition, calibrated increment to business may be allowed through supervisory engagement. The period of three months provided for charting out the plan for implementation shall be subsumed within the 24-months’ time-period. The roadmap for implementation of the enhanced regulatory requirement shall be submitted to the RBI and shall be subject to supervisory review.
What next after a NBFC is classified as NBFC-UL?
Once an NBFC is categorised as NBFC-UL, it shall be subject to enhanced regulatory requirement, at least for a period of five years from its classification in the layer, even in case it does not meet the parametric criteria in the subsequent years. In other words, it will be eligible to move out of the enhanced regulatory framework only if it does not meet the criteria for classification for five consecutive years. NBFC-UL may however move out of the enhanced regulatory framework before the period of five years if the movement is on account of voluntary strategic move to readjust operations as per a board approved policy. This stipulation shall not apply if the scaling down of operations is on account of adverse situations specific to the NBFC and its deteriorating financial conditions.