The Reserve Bank on Friday proposed a four-layered regulatory structure for non-banking financial companies (NBFCs) with progressive increase in intensity of regulation. According to a discussion paper released by the RBI, the NBFCs will be split into four layers -- base, middle, upper and top. The classification of the NBFCs, it said, will be based on host of parameters including size, leverage, intercon nectedness, substitutability, complexity and nature of activity, among others.
“...The regulatory framework envisages a progressive increase in the intensity of regulation,” said the RBI’s discussion paper on
‘Revised Regulatory Framework for NBFCs - A Scale-Based Approach’.
Stakeholders can send their comments on the paper to the RBI within a month.
Over the years, the NBFC sector has undergone considerable evolution. Higher risk appetite of NBFCs has contributed to their size, complexity and interconnectedness, making some of the entities systemically significant, posing potential threat to financial stability.
While NBFCs are under RBI’s regulation since 1964, the central bank introduced a comprehensive regulatory framework for the systemically important NBFCs in 2006, which was further refined in 2014. Since then, the RBI has been carrying out calibrated modifications to mould the regulations to the changing environment. Accordingly, within the universe of systemically important NBFCs, an additional identifier has been placed at Rs 5,000 crore, wherein, additional regulations have been made applicable to such large NBFCs. “Unbridled growth aided by less rigorous regulatory framework within an interconnected financial system can sow the seeds of systemic risk. Failure of any large and deeply interconnected NBFC is capable of transmitting shocks in to the entire financial sector and cause disruption even to the operations of the small and mid-sized NBFCs,” the RBI said. “Under the circumstances, regulatory framework for NBFCs needs to be reoriented to keep pace with the changing realities,” it said, and added a calibrated and graded regulatory framework proportionate to the systemic significance of NBFCs may be best suited.