Note4Students
From UPSC perspective, the following things are important :
Prelims level: NBFCs and their operations, Scale-Based Regulation of NBFCs
Mains level: NA
In the news
- 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.
- Currently, 16 NBFCs are placed in the upper layer.
What are Non-Banking Financial Companies (NBFCs)?
- A NBFC is a company registered under the Companies Act, 1956.
- It engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, and chit business.
- It does NOT include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
How are NBFCs different from Bank?
- NBFCs lends and make investments and hence their activities are akin to that of banks.
- However, there are a few differences as given below:
- Commercial Banks are regulated under Banking Regulation Act, 1949.
- NBFC CANNOT accept demand deposits.
- NBFCs DO NOT form part of the payment and settlement system and cannot issue cheques drawn on itself.
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is NOT available to depositors of NBFCs, unlike in case of banks.
Different types/categories of NBFCs registered with RBI
NBFCs are categorized:
- in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
- non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
- by the kind of activity they conduct.
Within this broad categorization the different types of NBFCs are as follows:
| Definition | |
| Asset Finance Company (AFC) | A financial institution primarily engaged in financing physical assets used in productive/economic activities, such as automobiles, tractors, machinery, and industrial equipment. |
| Investment Company (IC) | A company whose principal business involves acquiring securities. |
| Loan Company (LC) | A financial institution primarily engaged in providing finance through loans, advances, or other means for activities other than its own.
Does not include Asset Finance Companies. |
| Infrastructure Finance Company (IFC) | A non-banking finance company that deploys at least 75% of its total assets in infrastructure loans, with a minimum Net Owned Funds of ₹300 crore, a minimum credit rating of ‘A’ or equivalent, and a CRAR of 15%. |
| Systemically Important NBFCs | NBFCs with an asset size of ₹500 crore or more, as per the last audited balance sheet.
Considered significant due to their potential impact on the overall financial stability of the economy. |
Scale-Based Regulation of NBFCs
- Scale-based regulations came into effect in October 2021 and were implemented a year later by RBI.
- There are four layers namely the base layer, middle layer, upper layer and top layer.
- As on 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.
Here’s a breakdown of the key aspects of the SBR:
- Base Layer (NBFC-BL)
- The Base Layer primarily comprises non-deposit-taking NBFCs with assets below Rs 1,000 crore.
- It encompasses NBFC Peer to Peer (P2P), NBFC-Account Aggregator (AA), Non-Operative Financial Holding Company (NOFHC), and NBFCs without public funds and customer interface.
- Middle Layer (NBFC-ML)
- The Middle Layer includes deposit-taking NBFCs and non-deposit-taking NBFCs with assets exceeding Rs 1,000 crore.
- It encompasses NBFCs involved in specific activities such as Standalone Primary Dealers (SPDs), Infrastructure Debt Fund – NBFCs (IDF-NBFCs), Core Investment Companies (CICs), Housing Finance Companies (HFCs), and Infrastructure Finance Companies (NBFC-IFCs).
III. Upper Layer (NBFC-UL)
- The Upper Layer comprises NBFCs identified by RBI as requiring enhanced regulatory requirements based on specific parameters and scoring methodology.
- The top 10 eligible NBFCs in terms of asset size will always be placed in the Upper Layer, irrespective of other factors.
- Top Layer (NBFC-TL)
- NBFCs in the Upper Layer may be transferred to the Top Layer if RBI perceives a significant increase in potential systemic risk.
- Currently, the Top Layer remains vacant but serves as a precautionary measure for heightened risk situations.
With inputs from: https://rbi.org.in/scripts/PublicationsView.aspx?Id=21580
Practice MCQ:
Q. With reference to the Scale-Based Regulation of Non-Banking Financial Companies (NBFCs), consider the following statements:
- Higher the layer, least is the regulatory intervention required by the RBI.
- Currently, no NBFC is listed in the top layer.
Which of the given statements is/are correct?
a) Only 1
b) Only 2
c) Both 1 and 2
d) Neither 1 nor 2
Try this PYQ from CSE 2020:
- If you withdraw ` 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be:
(a) to reduce it by ` 1,00,000
(b) to increase it by ` 1,00,000
(c) to increase it by more than ` 1,00,000
(d) to leave it unchanged
Post your answers here.
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