Consolidated NBFC Regulations for all Scales and Functions

– Anita Baid, Vice President |

Updated as on 09.11.2023

The Reserve Bank of India (RBI) has issued a notification outlining a new regulatory framework for Non-Banking Financial Companies (NBFCs) on October 19, 2023 (‘SBR Framework’). The RBI has played a crucial role in regulating the NBFC sector over the years. With the sector’s evolution and changing dynamics, the regulator has been proactive in amending regulations. Previously, NBFCs were classified into two categories: systemically important and non-systemically important. However, starting from October 2022, the RBI introduced a new classification system based on layers: base, middle, upper, and top.

The reclassification introduced some progressive changes but also created certain ambiguities in the applicability of regulatory rules. Specifically, the terms “base layer” and “middle layer” were related with non-systemically important (non-SI) and systemically important (SI) NBFCs. When classifying NBFCs based on asset size, those with assets under Rs. 500 crores were considered non-SIs, while those with assets over Rs. 500 crores were classified as SIs.

However, the SBR Framework introduced a different set of criteria. According to this framework, NBFCs with assets less than Rs. 1000 crores are categorized as Base Layer entities, while those with assets exceeding Rs. 1000 crores are classified as Middle Layer entities. This creates a gray area for NBFCs with assets falling between Rs. 500 crores and Rs. 1000 crores.

To address this issue and provide a more streamlined regulatory framework, the RBI has issued the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (‘SBR Master Directions’).

The SBR Master Direction, effective immediately, intends to consolidate the various regulations for NBFCs of different scales and functions in one place. The consolidation has streamlined various regulations issued under the SBR Framework governing the different layers of NBFCs. It brings clarity to compliance requirements and ensures that all NBFCs operate within a framework that is consistent and transparent. The SBR Master Directions is divided into sections for different categories of NBFCs, based on size as well as function:

  1. Regulations for Base Layer;
  2. Regulations for Middle Layer (this would be in addition to the regulations for BL);
  3. Regulations for Upper Layer (this would be in addition to the regulations for BL and ML);
  4. Regulations for Top Layer (to be specifically communicated upon classification in TL);
  5. Specific Directions for MFIs this is in addition to the regulations based on layers);
  6. Specific Directions for Factors and NBFCs registered under Factoring Act (this is in addition to the regulations based on layers);
  7. Specific Directions for IDFs (this is in addition to the regulations based on layers).

Further, the specific regulations issued by the RBI would still be relevant and continue to be applicable for Housing Finance Companies, Core Investment Companies, NBFC-P2P, NBFC-Account Aggegator, deposit taking NBFCs, Residuary Non-Banking Companies, Mortgage Guarantee Companies and  Asset Reconstruction Companies. Additionally, based on the classification under the SBR Framework (BL or ML), the relevant provisions of the SBR Master Directions shall be applicable. 

Previously, under the SBR notification dated October 22, 2021, the RBI clarified that all references to NBFC-ND (non-systemically important non-deposit taking NBFC) would now be referred to as NBFC-BL, and all references to NBFC-D (deposit-taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) would be known as NBFC-ML or NBFC-UL, depending on the case.

Furthermore, it specified that existing NBFC-ND-SI with asset sizes of ₹ 500 crore and above but below ₹1000 crore (except those necessarily categorized as Middle Layer) would be reclassified as NBFC-BL.

However, upon an initial review of the SBR Master Directions, it appears that certain guidelines that were typically applicable to NBFC-SI and should logically apply to NBFC-ML are explicitly retained for NBFCs with asset sizes exceeding ₹ 500 crores. Here is a list of such guidelines:

  1. Prudential Framework for Resolution of Stressed Assets dated June 07, 2019, as amended from time to time would be applicable on all NBFCs-D and non-deposit taking NBFCs of asset size of ₹500 crore and above. It may be noted that there are specific norms for restructuring of advances by non-deposit taking NBFCs with asset size less than ₹500 crore
  2. Non-Cooperative Borrowers identification shall be done by all NBFC-Factors, NBFCs-D and non-deposit taking NBFCs of asset s.ize of ₹500 crore and above.
  3. Refinancing of Project Loans to any existing infrastructure and other project loans by non-deposit taking NBFCs with asset size less than ₹500 crore.
  4. Framework for Revitalizing Distressed Assets in the Economy shall apply to non-deposit taking NBFCs with asset size less than ₹500 crore.
  5. Early Recognition of Stress and Reporting to Central Repository of Information on Large Credits (CRILC) reporting by all NBFC-Factors, NBFC-D and non-deposit taking NBFCs of asset size of ₹500 crore and above. 

As the financial landscape continues to evolve, the RBI’s proactive approach ensures that the NBFC sector remains well-updated. 

Upon further perusal of the SBR Master Directions, it can be noticed that there are certain regulations that were issued under the SBR Framework that have not been consolidated, such as follows:

  1. Compliance Function and Role of Chief Compliance Officer (CCO) – NBFCs
  2. Implementation of ‘Core Financial Services Solution’ by Non-Banking Financial Companies (NBFCs)

Further, there are specific master directions on information technology framework, fraud reporting, etc. that have not been consolidated. It may also be noted that para 4.2 clarifies that the SBR Master Directions consolidate the regulations as issued by Department of Regulation (DoR); any other directions/guidelines issued by any other Department of the RBI, as applicable to an NBFC shall continue to be adhered to. Accordingly, the aforesaid regulations that were issued by the Department of Supervision (DoS) or Department of Non-Banking Supervision (DNBS) have not been consolidated and are neither listed in the Repeal Section of the SBR Master Directions. There does not seem to be any reason for the aforesaid regulations to be repealed, and hence, it seems that only those circulars and notifications that are issued by the DoR have been considered while compiling the regulations, including those introduced under the SBR Framework. Considering that there are standalone notifications on the aforesaid issued by the DoS or DNBS, therefore, the said regulations should also continue to be applicable.

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2 replies
  1. Mukesh Pande
    Mukesh Pande says:

    Hi, please let us know if single and group exposure guidelines are applicable for NBFC-Base Layer? This is required for a NBFC – Factors with asset size less than 50 cr.


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