RBI Releases NBFC Scale Based Regulation Directions, 2023

In the past, non-banking financial companies (NBFCs) were categorized into two groups: Systemically important (SI) and Non-Systemically Important (Non SI). In  October 2022, the RBI implemented a new classification system that categorized NBFCs into four layers: Base, Middle, Upper, and Top.

As per this classification, NBFCs having assets below Rs. 1000 crores were categorized as Base Layer entities, whereas those with assets surpassing Rs. 1000 crores were categorized as Middle Layer entities.  However, the layers were associated with SI and Non-SI categories i.e.  those under 500 Crores were considered Non-SI and those above that threshold were considered as SI.  This situation presented legal ambiguity for NBFCs with assets ranging from Rs. 500 crores to Rs. 1000 crores. In order to effectively address this issue and establish a more efficient regulatory structure, the RBI has now issued the Master Direction Reserve Bank of India (Non-Banking Financial Company Scale Based Regulation) Directions, 2023 through a circular dated October 19, 2023, that categorizes NBFCs into four tiers, determined by their size and scope of operations:

• Base Layer (Non-Banking Financial Companies – BL): Includes non-deposit taking (NBFCs) with assets less than ₹1,000 crore. Additionally, this encompasses Non-Banking Financial Companies (NBFCs) engaged in activities such as Peer-to-Peer Lending Platforms (NBFC-P2P), Account Aggregators (NBFC-AA), Non-Operative Financial Holding Companies (NOFHC), and NBFCs that do not handle public funds or interact with customers.
• Middle Layer (Non-Banking Financial Companies – ML): Includes all non-banking financial companies (NBFCs) that accept deposits, irrespective of the size of their assets. Also includes non-deposit taking Non-Banking Financial Companies (NBFCs) with assets of ₹1,000 crore and above, as per the applicable legal regulations. The company engages in a range of activities, including Standalone Primary Dealers (SPD), Infrastructure Debt Fund-NBFC (IDF-NBFC), Core Investment Companies (CIC), Housing Finance Companies (HFC), and Infrastructure Finance Companies (NBFC-IFC).
• Upper Layer (NBFCs-UL): Includes non-banking financial companies that have been specifically identified by the Reserve Bank of India for increased regulatory requirements, which are determined based on predefined parameters and a scoring methodology. The NBFCs with the highest asset size will consistently be positioned in the Upper Layer.
• Top Layer (NBFCs-TL): Ideally, it should remain empty and act as a buffer. Can be filled if the RBI determines that certain NBFCs in the Upper Layer represent a significant systemic risk.

These directions shall come into force with immediate effect.