TaxTMI 
TaxTMI 
Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs
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....ided to put in place a revised regulatory framework 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 (....
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....e Middle Layer. • The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage 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-....
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....atory changes under SBR for different layers in the regulatory structure - 3.2.1 Capital Guidelines - Regulatory changes under SBR applicable to NBFC-ML and NBFC-UL a) Internal Capital Adequacy Assessment Process (ICAAP) - NBFCs are required to make 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. Th....
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.... assessments of various sectors and their likely impact on business, as evaluated periodically, should help NBFCs determine such internal exposure limits. While the Board is free to determine various sub-limits within the overall SSE internal limits, the following are specifically prescribed: • A sub-limit within the commercial real estate exposure ceiling shall be fixed internally for 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 ens....
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....e course. Regulatory changes under SBR applicable to NBFC-ML and NBFC-UL d) Key Managerial Personnel - Except for directorship in a subsidiary, Key Managerial Personnel^9 shall not hold any office (including directorships) in any other NBFC-ML or NBFC-UL. A timeline of two years is provided with effect from October 01, 2022 to ensure compliance with these norms. It is clarified that they can assume directorship in NBFC-BLs. e) Independent Director - Within the permissible limits in terms of Companies Act, 2013, 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 effe....
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....ided. Detailed circulars will be issued in due course by the Reserve Bank on guidelines indicated at paras f, g, h, i and j above. Additional regulatory changes under SBR applicable to NBFC-UL k) Qualification of Board Members - Board members shall be competent to manage the affairs of the NBFC. The composition of the Board should ensure mix of educational qualification and experience within the Board. Specific expertise of Board members will be a prerequisite depending on the type of business pursued by the NBFC. l) Listing & Disclosures - NBFC-UL shall be mandatorily listed within 3 years of identification as NBFC-UL. Disclosure requirements shall be 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 sh....
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....nd benchmarks that would render them eligible for classification as NBFC-UL shall be intimated about the same to enable them to readjust their operations, in case they intend to continue to function as NBFC-ML on a long-term basis and do not want to graduate to NBFC-UL. 4.3 Review of Assessment Methodology - The methodology for assessing the NBFC-UL shall be reviewed periodically. 4.4 Classification of Government owned NBFCs - As per the Reserve Bank's circular on 'Withdrawal of Exemptions Granted to Government Owned NBFCs' dated May 31, 2018, the Government owned NBFCs are still in the transition period to attain the minimum CRAR. It has, therefore, been decided not to subject these NBFCs to the Upper Layer regulatory framework at this juncture. 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 regulator....