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.
“Based on specific parameters, some NBFCs could be moved to the top layer from the upper layers, and depending on they perform in the top layer, they could be contenders for bank licenses when opportunity open up,” said the source quoted above. The exercise of moving up select NBFCs from upper layer could hence be a precursor and a testing process for handing out bank licenses.
Currently, 16 non-banks are placed in the upper layer of which nine NBFCs, including Tata Sons Private Ltd, are led by large business houses (see table). Tata Capital, M&M Finance, L&T Finance and Bajaj Finance are some names doing the rounds for the upgradation to top layer.
Basis of upgradation
It is learnt that merely scale and size of an NBFC may not be a determining factor for upgradation in scale. The regulator is expected take a nuanced approach and rate non-banks on parameters such as ability to handle customer grievances, technology capabilities, asset granularity and composition of loan book, nature and quantum of business handled in-house, quality of board and top management, asset liability mismatch management, diversification of liabilities and so on.
“The regulator may not adopt a ‘one-size fit 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.
Also, the upgradation process is seen 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.
Scale based regulations came into effect on October 2021 and was implemented a year later. There are four layers namely 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.
List of NBFCs in 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
12 Tata Capital Financial Services
13 Aditya Birla Finance
14 HDB Financial Services
15 Muthoot Finance
16 Bajaj Housing Finance