The RBI wants to move from a more complicated way of deciding which NBFCs are in the ‘upper layer’ (a system that used lots of different numbers and qualities) to simply using an NBFC’s asset size. If an NBFC has 1 lakh crore rupees or more in assets, it will be considered upper layer. This change is part of the second update to the rules about registering NBFCs, being exempt from certain rules, and a scale-based regulation. The goal is a clear and simple way to identify the top NBFCs.
RBI moves to an asset-size based classification
To be included, the RBI will look at the NBFC’s most recent, checked financial statements. The RBI also says it will look at the 1 lakh crore figure every five years, and continue to regularly identify which NBFCs are in the upper layer. This is to make things less complex and make it easier for the companies to predict what will happen.
A major part of this change is that government-owned NBFCs that are big enough will now be in the upper layer. At the moment, the scale-based system usually puts NBFCs run by the government in the lower or middle tiers. The draft says this is about regulating in a way that doesn’t favor or disfavor ownership.
Inclusion of government-owned NBFCs and ownership neutrality
Essentially, state-owned businesses with assets over the limit will be watched as closely as private companies. The people in charge of the rules say this makes things fair and deals with the risk to the whole system, no matter who owns the company. People in the industry will be carefully looking at what the requirements to be eligible and how long they have to change will be.
This proposal comes at a time when big companies that invest in other businesses (core investment companies) that are already on the upper layer are being looked at. The RBI previously said the 15 biggest upper layer NBFCs had to be listed on the stock exchange, and when they didn’t meet the deadline, it got attention.
Listing rules and the context of large core investment companies
For example, one large holding company has reported assets over the proposed 1 lakh crore threshold, so the question of whether it will list and follow the rules is still important. If these new rules are brought in, they could change which companies have to be listed and meet all the requirements of the upper layer. Companies approaching this 1 lakh crore mark will need to think again about how they are governed and their plans for raising money on the financial markets.
The draft also says that all NBFCs in the upper layer will be able to use guarantees from state governments to move the risk of bad debts, and there won’t be a limit to how much they can use, as long as certain conditions are met. This could give large NBFCs more ways to manage risk and free up capital.
Operational flexibility: state guarantees as credit risk transfer instruments
Being able to use state guarantees without limits (but with rules) could lead to more formal agreements between NBFCs and state governments. The regulators will likely say what is needed to qualify for the guarantee, what paperwork is needed, and how much risk it carries, to avoid too much risk in one place and encouraging bad behavior.
Using just an asset size to decide who’s in the upper layer is simpler, but it raises the question of where to set that size and how often to change it. A fixed size is more open, but the RBI needs to review it regularly to keep up with how the industry is growing and to balance controlling risk to the system.
Implications for the NBFC ecosystem and next steps
The industry can expect to be asked for their opinions and feedback before the final rules are set. NBFCs with around 1 lakh crore rupees in assets should get ready for more thorough rules, better governance, and more information that must be made public. Those making policy will need to clarify how long companies have to make the changes, if any companies will be excluded, and how state-owned companies will be assessed.
In general, the draft shows the RBI wanting to make rules simpler and treat all owners equally, and is adding ways to transfer risk. These suggestions could completely change which companies are most closely supervised and affect their plans for being listed on the stock exchange, how much money they raise, and how they manage risk. People in the industry will be waiting for the final instructions from the RBI and when they will be put into place.
