RBI may move some NBFCs to the ‘top layer’ this year

Nearly two years after introducing a revised regulatory framework for non-banking finance companies (NBFCs), the Reserve Bank of India is set to review the categorisation of NBFCs in 2024.

Sources aware of the matter say the review has become imminent given how NBFCs have exploded in terms of growth, their business models, and operations have changed significantly from the time of initiating scale-based regulations.

“Some NBFCs backed by large corporate houses and conglomerates could be in focus for the purpose of this review,” said a source with knowledge of the development. Another person linked to the development hinted that this could also be a precursor to awarding bank licences to certain NBFCs.

Overview

“Based on specific parameters, some NBFCs could be moved to the top layer from the upper layers, and depending on how they perform in the top layer, they could be contenders for bank licenses when opportunity opens up,” said the source quoted above. The exercise of moving up select NBFCs from the upper layer could hence be a precursor and a testing process for handing out bank licenses.

Basis of Upgradation

It is learned that merely scale and size of an NBFC may not be a determining factor for upgradation in scale. The regulator is expected to take a nuanced approach and rate non-banks on parameters such as ability to handle customer grievances, technology capabilities, asset granularity, and composition of the loan book, nature and quantum of business handled in-house, quality of the board and top management, asset liability mismatch management, diversification of liabilities, and so on.

“The regulator may not adopt a ‘one-size-fits-all’ approach to gauge the candidates, and who should move to the top layer may be reviewed on a case-to-case basis,” said another senior official aware of the matter.

Regulatory Framework

Also, the upgradation process is seen as critical to remove the thought process which many NBFCs in the upper layer have, which is that they are already functioning like banks. In fact, on February 9, Deputy Governor M Rajeshwar Rao, in a speech, mentioned significant differences continue to exist between the regulations applicable to banks and NBFCs.

Current Status of NBFCs

Scale-based regulations came into effect in October 2021 and were implemented a year later. There are four layers namely base layer, middle layer, upper layer, and top layer. As of September 30, 2023, NBFCs in the base, middle, and upper layers constituted 6 per cent, 71 per cent, and 23 per cent of the total assets of NBFCs respectively. Presently, no NBFC is listed in the top layer.

List of NBFCs in the upper layer:

1. LIC Housing Finance

2. Bajaj Finance

3. Shriram Finance

4. Tata Sons Pvt Ltd

5. L&T Finance

6. Indiabulls Housing Finance

7. Piramal Capital & Housing Finance

8. Cholamandalam Investment and Finance

9. Shanghvi Finance Pvt Ltd

10. M&M Financial Services

11. PNB Housing Finance