The document outlines the Reserve Bank of India's revised regulatory framework for non-banking financial companies (NBFCs) called Scale Based Regulation (SBR). Under SBR, NBFCs will be categorized into four layers - base, middle, upper, and top - based on parameters like size and interconnectedness. Regulation will increase progressively across the layers, with the base layer facing the least regulation and the top layer the most stringent. Key aspects of the new framework include increased net owned funds requirements, tighter prudential norms, expanded disclosures, and governance guidelines for middle and upper layer NBFCs. A scoring methodology is also defined to identify NBFCs that will fall in the upper layer.

1. SCALE BASED REGULATION (SBR): A REVISED
REGULATORY FRAMEWORK FOR NBFCS
SECTION I
1.Regulatory structure for NBFCs:
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22nd October 2021
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SBR APPROACH
UPPER LAYER
MIDDLE LAYER
TOP LAYER
BASE LAYER
• NBFCs are now categorized
across four different layers
based on various parameters
including size, interconnected-
ness with the system, etc.
• A pyramid with the base layer
being subjected to the least
regulation and the topmost
layer facing the most stringent
regulations

2. 2. FOUR LAYER CLASSIFICATION OF NBFCS :
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• NBFCs with an asset size below INR
1,000 cr.
• peer-to-peer lending platforms,
account aggregators.
• non-operative financial holding
companies.
• NBFCs not accessing public funds nor
BASE LAYER
• All deposit-taking and non-deposit
taking NBFCs with an asset size of INR
1,000 Cr and above
• standalone primary dealers
MIDDLE LAYER
• NBFCs which are specifically identified
by the Reserve Bank as warranting
enhanced regulatory requirement
based on a set of parameters and
scoring methodology.
• Top 10 eligible NBFCs in terms of asset
size to be always reside in the upper
UPPER LAYER
• This Layer will remain empty.
• It can get populated if the Reserve
Bank is of the opinion that there is a
substantial increase in the potential
systemic risk from specific NBFCs in the
Upper Layer.
TOP LAYER

3. SECTION II
3. REGULATORY CHANGES UNDER SCALE BASED REGULATION
(SBR) :
I. Regulatory changes under SBR for all the layers in the regulatory
structure:
1.Net owned fund (NOF) has been increased for NBFC from 2 Cr to 10 Cr in phase
manner with some exceptions which is as under:-
• NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer
interface, the NOF is continued to be ₹2 Cr.
• No change have been made in the existing regulatory minimum NOF for NBFCs -
IDF, IFC, MGCs, HFC, and SPD.
2. The timeline for NBFC-BL has to adhere to 90 days NPA norms in phase
manner is as followed:-
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NBFCs Current NOF (IN
Cr )
By March 31, 2025
(Cr)
By March 31, 2027 (Cr)
NBFC-ICC ₹2 Cr ₹5 Cr ₹10 Cr
NBFC-MFI ₹5 Cr(₹2 Cr in
NE Region)
₹7 Cr (₹5Cr in NE
Region)
₹10 Cr
NBFC-
Factors
₹5 Cr ₹7 Cr ₹10 Cr
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NPA Norms for NBFC-BL Timeline
>150 days overdue By March 31, 2024
>120 days overdue By March 31, 2025
> 90 days By March 31, 2026

4. II. Regulatory changes under SBR for different layers in the regulatory
structure –
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Guidelines NBFC – Base Layer (NBFC-
BL)
NBFC – Middle Layer
(NBFC-ML)
NBFC – Upper Layer
(NBFC-UL)
1.Capital guidelines
Internal Capital Ade-
quacy Assessment
Process (ICAAP)
—
NBFCs are required to make a thorough internal as-
sessment of the need for capital, commensurate with
the risks in their business
Common Equity Tier 1
–
— — Maintaining at least 9 per
cent of Risk Weighted
Assets.
Leverage
— —
A suitable ceiling for
leverage to be prescribed
whenever necessary.
2. Prudential Guide-
lines
Concentration of credit
—
lending and investments to be merged into a single exposure
limit of 25% for single borrower/ party and 40% for single group
of borrowers/ parties
Sensitive Sector Expo-
sure (SSE)
—
• Board-approved internal limits for SSE separately
for capital market and commercial real estate ex-
posures
• Dynamic vulnerability assessments
• Supervisory review

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Guidelines NBFC – Base Layer
(NBFC-BL)
NBFC – Middle Layer
(NBFC-ML)
NBFC – Upper Layer (NBFC-UL)
Large Exposure Frame-
work
— —
large exposure of an NBFC to all
counterparties and groups of
connected counterparties to be
considered for exposure ceilings.
Internal Exposure Lim-
its
— —
An internal Board approved limit
for exposure to the NBFC sector to
be determined.
Governance Guidelines
Risk Management Com-
mittee
Constituting a Risk Man-
agement Committee
(RMC) either at the Board
or executive level.
— —
Disclosures
Requirements expanded
related party transactions,
loans to Directors/ Senior
Officers and customer com-
plaints
Loans to directors, sen-
ior officers and rela-
tives of directors
To have a board approved
policy on grant of loans to
entities
— —
Key Managerial
Personnel As per Companies Act, 2013
• Key Managerial Personnel to not hold any office (including direc-
torships)
• An Independent Director cannot be director in more than three
NBFCs (NBFC-ML and NBFC-UL) at the same time
• Corporate Governance report containing composition and cate-
gory of directors, shareholding of non-executive directors, etc.
• Items of income and expenditure of exceptional nature.
• Breaches in terms of covenants in respect to loans and securities
• Divergence in asset classification

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Guidelines NBFC – Base Layer
(NBFC-BL)
NBFC – Middle Layer
(NBFC-ML)
NBFC – Upper Layer
(NBFC-UL)
Compensation guidelines
— To have an approved board compensation policy and in-
cludes:
(i) Constitution of a Remuneration Committee
(ii) Principles for fixed/ variable pay structures
(ii) Malus/ claw back requirements
Chief Compliance Officer
— Appointment of Chief compliance officer is mandatory.
Other Governance matters
— Board to ensure good corporate governance practices in the
subsidiaries of the NBFC and maintain mechanism for direc-
tors and employees to report genuine concerns.
Core Banking Solution — 10 or more branches of NBFCs are mandated to adopt Core
Banking Solution.
Listing & Disclosures -
— — Mandatory listing within 3
years of identification as
NBFC-UL.
Qualification of Board
Members
• Professional experience in managing the affairs of NBFCs
• At least one of the directors shall have relevant experience of having worked in a bank/
NBFC.
Removal of Independent
Directors
— — Reporting to the supervisor in
case of independent director
been removed or resigned
before completion of his nor-
mal tenure.
Ceiling on IPO Funding
Ceiling of ₹1 Cr per borrower for financing subscription to Initial Public Offer (IPO) is manda-
tory.

7. Scoring Methodology for Identification of NBFC as NBFC-UL
• Scoring methodology for identification of an NBFC as NBFC-UL should be
based on the set of NBFCs fulfilling the following criteria:
⇒ Top 50 NBFCs (excluding top ten NBFCs based on asset size, which automatically
fall in the Upper Layer) based on their total exposure including credit equivalent
of off-balance sheet exposure.
⇒ NBFCs designated as NBFC-UL in the previous year.
⇒ NBFCs added to the set by supervisors using supervisory judgment.
The computation of scores of all NBFCs in the above set to be performed annually
based on their position as on March 31st each year.
Our Analysis:
• This scale based regulations changes are expected to increase the flexibility of
the sector going forward
• A significant portion of the listed NBFCs would form part of the Middle/Upper
layer and would need to comply with the new regulations related to
capitalization, disclosure norms, and governance.
• The level of regulation / compliance requirement increases with each layer.
• Capital guidelines can ensure availability of adequate capital to support all risks
in business as also to encourage NBFCs to develop and use better internal risk
management techniques for monitoring and managing their risks.
• In Base layer with asset size of less than INR 1000 cr no meaningful changes
have been suggested.
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Quantitative Parameters (70%) Qualitative Parameters (30%)
Size & Leverage: 35% Nature/type of liabilities: 10%
Interconnectedness: 210% Group Structure: 10%
Complexity : 10% Segment Penetration: 10%
Components of the parametric analysis
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