This post discusses RBI’s scale based regulatory framework for NBFCs. It explains the reasons behind RBI’s new approach and its impact on the fintech ecosystem.
In October 2021, RBI notified scale-based regulations for NBFCs (which will kick-in on 1 October 2022). With these regulations, RBI aims to increase transparency (in NBFC operations) through greater disclosures and improved governance standards.
NBFCs will be regulated according to their size, activity, and risk exposure. They will be categorised in base, middle, upper, and top layer. With each layer, regulations become stricter. Non-deposit taking NBFCs (with asset size below Rs.1000 crores), peer-to-peer lending platforms and account aggregators are in the base layer. And for this layer, RBI will prescribe light touch regulations. The middle layer consists of deposit taking NBFCs, non-deposit taking NBFCs (with asset size above Rs.1000 crores), standalone primary dealers, infrastructure debt funds, core investment companies, housing finance companies and infrastructure finance companies. In the upper layer are NBFCs which need greater regulatory supervision. The top ten NBFCs in terms of asset size will always be a part of the upper layer. For now, the top layer is empty. The RBI will move an NBFC to this layer if it poses higher systemic risk. But NBFCs (in all the layers) must comply with the risk management norms, disclosure norms etc. RBI will notify detailed guidelines for each category of NBFCs separately. For instance, in February 2022, the RBI announced that NBFCs in the middle and upper layer having more than 10 brick-and-mortar offices serving as a customer interface (staffed by employees or outsourced agents) must implement Core Financial Services Solution (CFSS) by September 2025. CFSS will be similar to the Core Banking Solution used by banks. It will provide a digital interface for customers to access products and services and enable better record-keeping for internal and regulatory purposes.
NBFCs are increasingly offering new financial products and services and adapting to technology led processes. Over the last five years, NBFCs have grown at 17.91 %. With deeper permeation of NBFCs in the financial services fabric, RBI is bound to step-in. Recent failure of some NBFCs like IL&FS is another cause for concern. Historically, light touch regulatory design permitted NBFCs to perform a wider spectrum of activities than banks. Like peer-to-peer lending, account aggregation and micro-lending on scale. NBFCs also play a big role in delivery of last mile financial services including digital credit. By leveraging AI, machine learning and lower compliance costs, NBFCs can also dole out cheaper loans.
Is this good for fintech?
Yes, we think so. Curating regulations (based on size and impact of a product or service) is a good way to regulate the tech ecosystem. It keeps large NBFCs and their fintech ambitions in check. Another example of proportionate regulation is Intermediary Guidelines, 2021. Where ‘significant social media intermediaries’ (which have more than 50 lakh registered users) must follow more stringent norms compared to other intermediaries. This regulatory framework lowers the compliance burden on smaller players, while keeping large tech companies in check.
(This post has been authored by the fintech team at Ikigai Law.)