The Scale-Based Regulatory (SBR) framework, introduced by the Reserve Bank of India (RBI), marks a significant shift in the regulation and supervision of Non-Banking Financial Companies (NBFCs). This approach aligns regulatory intensity with the size, activity, and risk profile of NBFCs, thereby promoting a more calibrated and proportionate oversight mechanism.
On October 19, 2023, the RBI issued a notification detailing the new regulatory framework under the SBR approach. Historically, NBFCs were categorized as either systemically important (SI) or non-systemically important (non-SI). However, with the evolution of the sector, the RBI adopted a more granular classification, effective from October 2022, dividing NBFCs into four regulatory layers: Base, Middle, Upper, and Top.
Evolution of Classification
Under the earlier regime, NBFCs with asset sizes below ₹500 crore were classified as non-SI, while those exceeding ₹500 crore were treated as SI. The SBR Framework has introduced a revised criterion, wherein:
- Base Layer (BL): NBFCs with asset size less than ₹1,000 crore.
- Middle Layer (ML): NBFCs with asset size of ₹1,000 crore and above.
This redefinition has introduced a degree of ambiguity for entities with asset sizes between ₹500 crore and ₹1,000 crore, which previously fell under the SI category. To address such inconsistencies and provide greater clarity, the RBI has issued the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (“SBR Master Directions”).
Objective and Structure of the SBR Master Directions
The SBR Master Directions aim to consolidate the regulatory provisions applicable to various categories of NBFCs based on scale and function. This unified approach enhances regulatory clarity, ensures uniformity in compliance requirements, and facilitates transparent governance across the sector.
The SBR Master Directions are organized into the following sections:
- Base Layer (BL): General regulations for all NBFCs in the base category.
- Middle Layer (ML): Regulations applicable in addition to BL requirements.
- Upper Layer (UL): Additional regulatory requirements over and above BL and ML.
- Top Layer (TL): To be defined upon classification into this category.
The Master Directions also include specific regulations for:
- Microfinance Institutions (MFIs)
- NBFC-Factors and entities registered under the Factoring Regulation Act
- Infrastructure Debt Funds (IDFs)
Additionally, specialized NBFCs such as Housing Finance Companies (HFCs), Core Investment Companies (CICs), NBFC-Peer to Peer Lending Platforms (NBFC-P2P), NBFC-Account Aggregators (NBFC-AA), deposit-taking NBFCs (NBFC-D), Residuary Non-Banking Companies (RNBCs), Mortgage Guarantee Companies (MGCs), and Asset Reconstruction Companies (ARCs) will continue to be governed by their respective regulations in addition to relevant provisions under the SBR Master Directions.
Regulatory Mapping and Reclassification
As per the original SBR notification dated October 22, 2021, the RBI redefined the categorization of NBFCs as follows:
- NBFC-ND (Non-Systemically Important Non-Deposit Taking NBFCs) → NBFC-BL
- NBFC-D (Deposit-Taking NBFCs) and NBFC-ND-SI (Systemically Important Non-Deposit Taking NBFCs) → NBFC-ML or NBFC-UL depending on asset size and other criteria.
It was also clarified that NBFC-ND-SIs with asset sizes between ₹500 crore and ₹1,000 crore (unless otherwise classified) would now fall under the Base Layer. Despite this reclassification, several key regulatory guidelines that traditionally applied to SI-NBFCs continue to reference the ₹500 crore threshold.
Examples of Guidelines Retaining ₹500 Crore Threshold
The following regulations continue to apply to NBFCs with asset sizes of ₹500 crore and above:
- Prudential Framework for Resolution of Stressed Assets (dated June 7, 2019): Applicable to all NBFC-D and non-deposit taking NBFCs with asset size of ₹500 crore and above.
- Identification of Non-Cooperative Borrowers: Required for NBFC-Factors, NBFC-Ds, and non-deposit taking NBFCs with assets ≥ ₹500 crore.
- Early Recognition of Stress and CRILC Reporting: Applicable to NBFC-Factors, NBFC-Ds, and NBFCs above the ₹500 crore threshold.
- Refinancing of Infrastructure Projects and Revitalizing Distressed Assets: Subject to different norms based on whether asset size is above or below ₹500 crore.
Incomplete Consolidation of SBR Framework
While the SBR Master Directions aim to consolidate relevant regulations, a few areas remain excluded from the consolidation:
- Compliance Function and Role of Chief Compliance Officer (CCO)
- Implementation of Core Financial Services Solution (CFSS)
- Master directions on IT framework, fraud reporting, etc.
This is because paragraph 4.2 of the SBR Master Directions clarifies that only regulations issued by the Department of Regulation (DoR) have been included in the consolidation. Other applicable directions or guidelines issued by the Department of Supervision (DoS) or the former Department of Non-Banking Supervision (DNBS) will continue to remain in force and are not repealed or listed under the Repeal Section of the Master Directions.
Conclusion
The SBR Framework and the accompanying Master Directions represent a significant step towards a risk-based, proportionate regulatory regime for NBFCs. While the RBI has made notable progress in consolidating and streamlining the regulatory landscape, certain ambiguities—particularly around mid-sized NBFCs and unincorporated regulations—necessitate further clarity. Nonetheless, the RBI’s proactive regulatory posture ensures that the NBFC sector remains resilient, transparent, and well-equipped to address emerging risks in a dynamic financial ecosystem.
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