NBFCs: Scale-Based Regime

INTRODUCTION

Non-Banking Financial Companies or NBFCs are often called shadow banks since they perform quasi- banking activities. Considering their importance from a financial system perspective, the RBI strictly regulates NBFCs. However, a one-size fits all NBFCs approach was often considered very oppressive to the smaller NBFCs. Recognising this anomaly, the RBI in 2023 issued the Reserve Bank of India (NBFC Scale-Based Regulation) Directions, 2023 (“the Directions”). What the Directions seek to do is to classify NBFCs into four layers: Base, Middle, Upper and Top. As the layer increases, the quantum of compliance and regulations increase. Hence, a Top Layer NBFC would have maximum regulations whereas a Base Layer NBFC would have least compliances and regulations. Let us examine some facets of this scale-based classification.

DETERMINATION OF NBFC STATUS

Any company which carries on the business of a non- banking financial institution as its principal business as defined in section 45-I(c) read with section 45-I(f) of the RBI Act, 1934 shall be treated as an NBFC and requires registration under section 45-IA of the RBI Act. However, certain companies have been exempted by the RBI from registering as NBFCs, even though they otherwise satisfy all the tests. These