RBI releases list of Non-Banking Financial Company (NBFCs) in the Upper Layer (NBFC-UL) for 2024-25

Recent Context

1. The Reserve Bank of India (RBI) recently released the list of Non-Banking Finance Companies (NBFCs) in the upper layer segment for the year 2024-25,
2. It included NBFCs such as Tata Sons Private Ltd, Bajaj Finance Ltd, LIC Housing Finance Ltd and Aditya Birla Finance Ltd.
3. The list as per the Scale Based Regulation (SBR) framework for NBFCs issued by the RBI.

What are the key highlights of the list?

1. Tata Sons continues to be in the NBFC upper layer (UL) list despite its proposal to deregister as a non-banking finance company.
2. Piramal Enterprises has not been included in the current list of NBFC-UL in due to ongoing reorganisation in the business group despite being qualified under NBFC-UL.
   1. Reorganisation in business refers to the process of making significant changes to a company's structure, operations, or ownership with the goal of improving efficiency, profitability, or adapting to market shifts.

What is a Non-Banking Financial Company (NBFC)?

1. A NBFC is a company registered under the Companies Act, 1956,

2. Engaged in the business of:

   1. loans and advances,
   2. the acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities,
   3. leasing, hire-purchase, insurance business, chit business.

3. It excludes institutions mainly involved in:

   1. Agriculture
   2. Industrial activity
   3. Trading goods (except securities)
   4. Providing any services and sale/purchase/construction of immovable property.

4. Types of NBFCs (based on financial services)

   1. Asset Finance Companies (AFCs)
   2. Infrastructure Finance Companies (IFCs): e.g. IL&FS
   3. Micro Finance Institutions (NBFC-MFIs)
   4. Core Investment Companies: They invest in shares and bonds of other companies
   5. Housing Finance Companies etc.

5. How are NBFCs different from banks?

Aspect	Banks	NBFCs
Accept Demand Deposits	Yes	No
Part of Settlement or Payment Framework	Yes	No
Issue Cheques	Yes	No
Offer Deposit Insurance Facility	Yes	No
Deposit Insurance Coverage	Up to ₹5 lakh per depositor per bank [Provided by the DICGC (Deposit Insurance and Credit Guarantee Corporation); applicable to Commercial banks, Co-operative banks, Regional Rural banks and Local Area banks]	N/A

What is Scale Based Regulation (SBR) framework?

1. The Reserve Bank had issued the Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs on October 22, 2021.
2. Purpose: SBR aims to align regulations with the changing risk profiles of NBFCs, ensuring that regulatory requirements are proportional to the potential risks they pose.
3. The regulatory structure for NBFCs shall comprise of four layers based on their size, activity, and perceived riskiness.
4. The layers and the methodology followed are as follows:
   1. Base Layer (NBFC-BL)
      1. Non-deposit taking NBFCs below the asset size of ₹1000 crore
      2. NBFC-Peer to Peer Lending Platform (NBFC-P2P)
      3. NBFC-Account Aggregator (NBFC-AA) etc.
         1. Account Aggregator acts as an intermediary that facilitates the seamless and secure transmission of financial data between different financial institutions.
   2. Middle Layer (NBFC-ML)
      1. All deposit taking NBFCs (NBFC-Ds), irrespective of asset size
      2. Non-deposit taking NBFCs with asset size of ₹1000 crore and above
      3. Standalone Primary Dealers (SPDs), Infrastructure Debt Fund NBFCs, Core Investment Companies (CICs), Housing Finance Companies (HFCs) and Infrastructure Finance Companies (NBFC-IFCs).
   3. Upper Layer (NBFC-UL)
      1. NBFCs identified by RBI based on specific parameters and scoring methodology.
      2. The parameters include size and leverage, interconnectedness, complexity, liabilities etc.
      3. Some key regulatory implications include: Stricter Capital Requirements, Increased Disclosure Obligations, Corporate Governance Enhancements, Systemic Risk Management.
      4. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
      5. Once an NBFC is classified as NBFC-UL, it shall be subject to enhanced regulatory requirement, at least for a period of five years, even if it may not meet the parameters in the subsequent years.
   4. Top Layer (NBFC-TL)
      1. It will ideally remain empty.
      2. The NBFCs from the Upper Layer may be moved to the Top Layer if in the opinion of RBI there is potential systemic risk from specific NBFCs.

What are the positive impacts of RBI's Scale Based Regulation on the NBFC Sector?

1. Greater Financial Stability: By identifying systemically important NBFCs, RBI aims to prevent contagion risks in the financial system.
2. Boosts Investor and Customer Confidence: Stricter regulations enhance trust in the NBFC sector, attracting more investments from institutional and retail investors
3. Better Liquidity management: Minimum liquidity requirements for NBFCs ensures that they maintain sufficient high-quality liquid assets, reducing liquidity mismatches.
4. Operational Resilience: Stricter norms encourage NBFCs to strengthen their internal controls and operational efficiencies.

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