Reserve Bank of India (RBI) has proposed a tighter regulatory framework for non-banking financial companies (NBFCs) by creating a four-tier structure. The intensity of regulations will be greatest at the top layer and lowest at the base layer.
Objective: It is to keep the big NBFCs in good financial health. It has become
important after the failure of extremely large NBFC like IL&FS.
Four Tier Structure:
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Base layer:
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This layer will include the large number of small NBFCs in the country and will subject to the least regulation.
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It is because they have a limited impact on systemic stability.
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The proposals for this set of NBFCs include:
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Entry-level net owned funds required to be raised to Rs 20 crore from Rs 2 crore.
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NPA classification norm of 180 days will be harmonized to 90 days.
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Disclosure requirements will be widened by including disclosures on types of exposure, related party transactions, customer complaints.
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Middle Layer:
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It will consist of NBFCs that currently fall in the ‘systemically important’ category along with deposit-taking non-bank lenders.
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Housing Finance Companies, Infrastructure Finance Companies, Infrastructure Debt Funds, Core Investment Companies.
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The proposals for this set of NBFCs include:
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It will be subjected to tighter corporate governance norms.
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No changes proposed in the capital-to-risk-assets ratio (CRAR) of 15% with a minimum Tier-I ratio of 10%.
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These NBFCs cannot provide loans to companies for buy-back of securities.
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NBFCs with 10 or more branches will be required to adopt core banking solutions.
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Upper Layer:
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It will include about 25-30 NBFCs and will be subjected to bank-like regulation.
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It will have to implement differential standard asset provisioning and also the large exposure framework as applicable to banks.
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The concept of Core Equity Tier-1 will be introduced for this category and is proposed to be set at 9%.
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They will also be subject to a mandatory listing requirement.
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Top Layer: This layer will be empty for now and will be populated with NBFCs, where the RBI may see an elevated systemic risk.
What was the need for a change in the regulatory framework?
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The size of NBFC has increased from just about 12% of banks in 2010, to a quarter of the banking sector.
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The growth has been facilitated by the lighter regulations on sourcing funds from home loans to micro-finance and large infrastructure projects.
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However, These lighter regulations revealed a systematic risk. For instance, IL&FS’s payment defaults resulted in a large scale economic crisis in 2018.