RBI Review of Scale-Based Regulation (SBR) for NBFCs

• The Reserve Bank of India (RBI) has initiated a review of the Scale-Based Regulation (SBR) framework for Non-Banking Financial Companies (NBFCs).
• The review comes amid the growing role of NBFCs in lending, which now accounts for around 15% of India’s GDP.
• Concerns prompting the review include NBFC–bank interconnectedness, rising unsecured loans, and potential systemic risks.

About the SBR Framework for NBFCs

• The Scale-Based Regulation (SBR) framework was implemented by the RBI in 2022.
• The framework classifies NBFCs into four regulatory layers.
• The classification is based on systemic importance, size, and perceived risk levels.

Base Layer (NBFC–BL)

• The Base Layer consists of non-deposit taking NBFCs with assets below ₹1,000 crore.
• It includes Peer-to-Peer (P2P) lending platforms, which directly connect borrowers and lenders.
• It also includes Account Aggregators (AAs), which enable consent-based sharing of financial data.
• The layer includes Non-Operative Financial Holding Companies (NOFHCs), which hold bank shares without operational roles.
• NBFC–BL accounts for 5.2% of total NBFC assets.

Middle Layer (NBFC–ML)

• The Middle Layer includes all deposit-taking NBFCs (NBFC-D), irrespective of asset size.
• It also includes non-deposit taking NBFCs with assets of ₹1,000 crore and above.
• NBFC–ML accounts for the largest share of NBFC assets at 64.6%.

Upper Layer (NBFC–UL)

• The Upper Layer comprises NBFCs specifically identified by the RBI for enhanced regulation.
• Identification is based on a set of parameters and a scoring methodology assessing systemic risk.
• NBFC–UL accounts for 30.2% of total NBFC assets.

Top Layer

• The Top Layer includes NBFCs assessed as having extreme supervisory risk perception.
• These NBFCs are subject to enhanced and intensive supervisory engagement by the RBI.
• Ideally, the Top Layer is expected to remain empty.

About Non-Banking Financial Companies (NBFCs)

• An NBFC is a company registered under the Companies Act, 1956 or the Companies Act, 2013.
• NBFCs are primarily engaged in lending, investment in securities, and leasing or hire-purchase activities.

Key Differences Between NBFCs and Banks

• NBFCs cannot accept demand deposits, such as savings or current account deposits.
• NBFCs do not form part of the payment and settlement system.
• NBFCs cannot issue cheques drawn on themselves.
• Depositors of deposit-taking NBFCs do not receive deposit insurance from the Deposit Insurance and Credit Guarantee Corporation (DICGC).