Clearing the fog on applicability of SBR norms

Streamlined Regulatory Framework for CICs and HFCs

– Qasim Saif | AVP | qasim@vinodkothari.com

On October 22, 2021, the RBI introduced the Scale-Based Regulation (SBR) framework for NBFCs through the circular titled “A Revised Regulatory Framework for NBFCs” (‘SBR Circular’)[1]. This framework applied to all NBFCs, including Core Investment Companies (CICs) and Housing Finance Companies (HFCs), both placed under the Middle Layer or the Upper Layer (and not in the Base layer), as the case may be.

Under the erstwhile regime, NBFC-Investment and Credit Company (NBFC-ICC) were classified as systemically important and non-systemically important based on the asset size threshold of Rs.500 crores. There were two separate sets of Master Directions for each – Master Directions of NBFC-SI and Master Directions for NBFC-NSI. On October 19, 2023, the aforesaid Master Directions for NBFC-ICCs were superceded with the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (SBR-MD)[2] wherein the NSI and SI regulations along with the additional requirements under the SBR were compiled and segregated based on the layers. However, there was ambiguity regarding the applicability of the additional requirements under the SBR Circular on CICs,  HFCs, P2P and such other specific categories of NBFCs. This was because the specific master directions for such specific NBFCs, were not updated to include the applicability of regulations issued under the SBR Circular; neither was there a reference of the applicability under the SBR-MD.

Paragraph 4.3 of the SBR-MD created further confusion by stating that specific classes of NBFCs, such as CICs and HFCs, would continue to follow their respective guidelines, effectively creating two sets of regulations to be applicable on them—one from their relevant Master Directions and the other under the SBR Circular, by virtue of falling under the Middle Layer or Upper Layer.

The RBI has now amended the respective master directions for CICs and HFCs by including the specific regulations prescribed under the SBR Circular. This confirms that CICs and HFCs will be regulated under their respective Master Directions and will not need to refer to the SBR Master Directions. Further, for Upper Layer CICs and HFCs, based on the reference in the respective Master Directions, the SBR Master Directions will apply to the extent of additional compliance requirements for the Upper Layer.

A quick snapshot of the additional regulations applicable on Middle Layer and Upper Layer CICs and HFCs is captured herein below:

ClassificationCICsHFCs
  Middle LayerInternal Capital Adequacy Assessment ProcessInternal Capital Adequacy Assessment Process
Disclosures in Financial StatementsDisclosures in Financial Statements
Experience of the BoardExperience of the Board
Non permissibility for holding of positions other than subsidiary by the Key Managerial PersonnelNon permissibility for holding of positions other than subsidiary by the Key Managerial Personnel
Restrictions on holding of positions by Independent DirectorsRestrictions on holding of positions by Independent Directors
Guidelines on Compensation of Key Managerial Personnel and Senior Management in CICsGuidelines on Compensation of Key Managerial Personnel and Senior Management in HFCs
Formulation of Risk Management CommitteeRisk Management Committee
Upper Layer  Common Equity Tier 1
Maintenance of differential standard asset provisioningMaintenance of differential standard asset provisioning
Disclosures in Financial Statements – (NTA) under Annex VII of the Master DirectionsDisclosures in Financial Statements – (NTA)  under Annex VII of the Master Directions
Qualification of Board MembersQualification of Board Members
Mandatory ListingMandatory Listing
Transition PlanTransition Plan
Large Exposure Framework
Regulatory reporting of Large Exposures
Internal Exposure Limits

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12179&Mode=0

[2] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550

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