This article is written by Mr. Bhumesh Verma, Managing Partner at Corp Comm Legal

The Reserve Bank of India (RBI) is in a clean up mode again and mulling on revising existing Non-banking Finance Company (NBFC) norms. This exercise will be carried out by tightening capital, lending and governance norms, the underlying intent being to curb defaults in light of ILFS and Dewan Housing Finance misdeeds.

The RBI is keen to develop a four-layered regulatory structure to monitor the implementation of proposed norms.

Gist of prospective norms

  • The underlying intent in revision of existing NBFC framework is to establish compliance structure with a categorization of NBFCs into different layers (i.e Top layer, Upper layer, Middle Layer and Base layer).
  • RBI intends to tighten the compliance norms on defaulting NBFCs based on the layer by rationalizing the norms which are in prevalence.
  • Any NBFC pursuant to which risk parameters are very high will be inducted into Top layer class. Otherwise, classification of NBFCs will take place based on level of risk involved into:

          Upper layer (NBFC-Upper Layer (NBFC-UL))

          Middle Layer (NBFC-Middle Layer (NBFC-ML))

          Lower layer (NBFC-Base Layer (NBFC-BL))

  • Typically the probability of inclusion of any NBFC into Top layer bracket is a rare prospect – Any NBFC in Upper layer associated with high risk economic transactions could be moved up into Top layer.
  • Proposal of mandatory listing requirements for Upper layer NBFC in line with private banks is under consideration.
  • Higher capital charge (including capital conservation buffers) will be levied on NBFCs in Top layer bracket.
  • Minimum capital of INR 20 crore is proposed for any entity to enter into NBFC business – Existing minimum capital requirement is INR 2 crore only.
  • To upscale the capital requirements of NBFCs and to augment quality standards in regulating capital – Imposition of mandatory capital requirement of 9% for NBFCs in Upper layer along with inception of standard asset provision norms is proposed by RBI.
  • Another prospect is that cut down of classification period for default entities from 180 days to 90 days to strike right balance amid banks and NBFCs in relation to bad asset identification.

One can hope that these prospective norms will facilitate and improve governance and compliance aspects of NBFC segment and prevent frauds.

Picture Credit: “money and bank” by 401(K) 2013 is licensed with CC BY-SA 2.0. To view a copy of this license, visit https://creativecommons.org/licenses/by-sa/2.0/