The classification of the NBFCs, it said, will be based on host of parameters including size, leverage, interconnectedness, 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.
The base layer will consist of NBFCs currently classified as non-systemically important NBFCs (NBFC-non deposit taking), besides Type I NBFCs, non-operative financial holding company, NBFC-P2P (peer to peer lending platform) and NBFC-AA (account aggregator).
The current threshold for systemic importance is Rs 500 crore. This threshold needs recalibration, taking into account increase in general price levels as well as increase in real GDP since 2014, the paper said. It proposes to raise this threshold to Rs 1,000 crore.
The middle layer will consist of all non-deposit taking NBFCs classified currently as NBFC-ND-SI (systematically important non-deposit taking company) and all deposit taking NBFCs.
The upper layer would comprise only those NBFCs which are specifically identified as systemically significant, based on a set of parameters.
The paper further said the top layer is supposed to remain empty.
The layer can get populated in case the RBI takes a view that there has been unsustainable increase in the systemic risk spill-overs from specific NBFCs in the upper layer. Such NBFCs judged to be extreme in supervisory risk perception would be pushed to the top layer from the upper layer.
NBFCs in this layer will be subject to higher capital charge, including capital conservation buffers. There will be enhanced and more intensive supervisory engagement with these NBFCs, it added.