NBFC-Upper Layer Framework: Revised SBR Framework & New NBFC-UL Criteria Explained

The Reserve Bank of India (RBI) has proposed draft amendments to revise Non-Banking Financial Companies in the Upper Layer (NBFC-UL) identification criteria under the Scale-Based Regulatory (SBR) framework.

• At present, government-owned NBFCs are placed in the Base Layer (NBFC-BL) or Middle Layer (NBFC-ML) under the regulatory framework.
  • The proposed changes seek to include eligible government-owned NBFCs in the Upper Layer (NBFC-UL) based on their asset size, ensuring a more uniform and ownership-neutral regulatory approach.

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About Scale-Based Regulatory (SBR) Framework for NBFCs

• The Scale-Based Regulatory (SBR) framework is a regulatory approach introduced by the Reserve Bank of India to classify and regulate Non-Banking Financial Companies (NBFCs) based on their size, activity, and risk profile.

Key Features of (SBR) Framework

• Dynamic and Risk-Based Classification: NBFCs are classified into different layers based on their size, complexity, and evolving risk profile, ensuring flexibility in regulation.
  • For Example: An NBFC growing rapidly in assets may move from Middle Layer to Upper Layer.
• Proportionate Regulation: Regulatory requirements increase with the level of risk posed by the NBFC, ensuring balanced oversight.
  • For Example: Small NBFCs in the Base Layer face lighter norms, while large NBFCs face stricter compliance.
• Enhanced Governance and Compliance Norms:  Higher layers are subject to stricter corporate governance standards, board oversight, and transparency requirements.
  • Upper Layer NBFCs must follow tighter disclosure norms and governance practices similar to banks.
• Strengthened Capital and Prudential Requirements: NBFCs in higher layers are required to maintain higher capital adequacy and tighter risk management standards.
  • For Example: Large NBFCs must hold additional capital buffers to absorb financial shocks.
• Focus on Financial Stability and Systemic Risk Control: The framework aims to prevent systemic risks arising from large NBFCs and protect the broader financial system.
  • For Example: Close supervision by the Reserve Bank of India for NBFC-UL entities to avoid crises like IL&FS.

Scale Based Regulation Framework for NBFC

About Non-Banking Finance Company-Upper Layer

• NBFC-UL (Non-Banking Financial Company – Upper Layer) is a regulatory classification introduced by the Reserve Bank of India under its Scale-Based Regulation (SBR) framework for NBFCs.
  • For Example: Bajaj Finance, Shriram Finance, Tata Capital
• NBFC-UL: These include entities that pose significant systemic risks owing to their size, complexity, and interconnectedness.
• Key aspects of NBFC-UL:
  • Classification: Consists of the top ten NBFCs by asset size along with others selected through a scoring-based methodology.
  • Regulatory Norms: They are subject to stricter regulatory norms, such as mandatory listing within three years, enhanced governance standards (higher capital buffers, liquidity requirements), and close supervision.
  • Time Period: Once categorized under the Upper Layer, NBFCs are required to adhere to these norms for a minimum of five years, even if their risk parameters decline.

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Proposed Revised Framework by Reserve Bank of India

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