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RBI SET UP REVISED REGULATORY FRAMEWORK FOR NBFCs CALLED SCARE BASED REGULATION (SBR)

RBI SET UP REVISED REGULATORY FRAMEWORK FOR NBFCs CALLED SCARE BASED REGULATION (SBR)

Context:

Recently, the Reserve Bank of India (RBI) set up a revised regulatory framework for NBFCs called Scale Based Regulation (SBR). These guidelines will be effective from October 01, 2022.

Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs:

  • Over the years, the sector has undergone an evolution in terms of size, complexity, and interconnectedness within the financial sector. Several entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile.
  • According to the announcement made in the Statement on Developmental and Regulatory Policies dated December 04, 2020, a discussion paper titled ‘Revised Regulatory Framework for NBFCs - A Scale-based Approach’ was issued for public comments on January 22, 2021. It has now been decided to put in place a revised regulatory framework for NBFCs (Annex).
  • As the SBR framework consists of different facets of regulation of NBFCs covering capital requirements, prudential regulation, governance standards etc., it has been decided to 1st issue an integrated regulatory framework for NBFCs under SBR giving a holistic view of the SBR structure, set of fresh regulations being introduced and respective timelines.

Key Highlights:

  • Now in order to regulate NBFCs under the Scale Based Regulation (SBR), the RBI has divided NBFCs into four layers (or 4 scales) based on their size, activity, and perceived riskiness.
  • These are: NBFC - Base Layer (NBFC-BL), NBFC - Middle Layer (NBFC-ML), NBFC - Upper Layer (NBFC-UL) and NBFC - Top Layer (NBFC-TL).
  • The top layer will remain empty. This layer could be filled if the Reserve Bank is of the opinion that there is a significant increase in the potential risk from certain NBFCs in Upper Layer.

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