RBI announces the list of 16 NBFC included in the NBFC-Upper Layer for enhanced supervision

Tags: Economy/Finance

The Reserve Bank of India (RBI) released the list of 16 Non-Banking Finance Companies- Upper List (NBFC-UL) on 30 September 2022 for better and enhanced regulation of the sector. 

In October 2021, RBI introduced scale based regulation for NBFC.

Scale Based Regulation 

RBI introduced the concept of scale based regulation for the NBFC on the basis of the model developed by the Basel Committee on Banking Regulation (BCBS).  The BCBS model provided for proportionality of regulation of banks according to the size of the Banks and its importance in the country’s economy.

If the bank was very big and if its collapses can badly affect a country’s economy, then those types of banks needed more supervision by the country’s central bank.

These types of banks in India are called Domestic- Systemically Important Banks (D-SIB). They are ICICI Bank, HDFC Bank and SBI.

Types of NBFC and Scale Based Regulation

Similar concept has been introduced for NBFC in India. According to risk and their importance to the economy, RBI has divided NBFC into four layers: Base Layer, Middle Layer, Upper Layer and Top Layer.

NBFCs in the lower layer will be known as NBFC-Base Layer (NBFC-BL). NBFCs in the middle layer will be known as NBFC-Middle Layer (NBFC-ML), NBFCs in the Upper Layer will be known as NBFC-Upper Layer (NBFC-UL) and NBFCs in the Top Layer will be known as NBFC-Top Layer (NBFC-TL).

The Base layer NBFC are considered to be less important and less risky and the upper layer has the highest risk of affecting the economy if they fail. 

The level of supervision of the NBFC by the RBI will depend on the risk as per the principle of proportionality of regulation.  It means the Upper layer NBFC will be very closely regulated by the RBI and they will have to follow extra guidelines of the RBI.

The level of regulation will relax as one goes down the list.

RBI does not expect any NBFC to be put in the top layer.

List of the companies  

The 16 companies in the NBFC-UL list are: 

LIC Housing Finance, Bajaj Finance, Mahindra & Mahindra Financial Services, Shriram Transport, Tata Sons, L&T Finance, Indiabulls Housing Finance, Piramal Capital & Housing Finance, Cholamandalam Investment and Finance Co., Shanghvi Finance Pvt. Ltd, Muthoot Finance, PNB Housing Finance, Tata Capital Financial Services, Aditya Birla Finance, HDB Financial Services and Bajaj Housing Finance.
 Regulation of NBFC by RBI 

NBFC has been mentioned in the Reserve Bank of India (RBI) Act 1934. However, it got the power to regulate and supervise  the NBFC only in 1964 when Chapter III-B was inserted  in the Reserve Bank of India Act, 1934 (‘RBI Act’). The RBI’s power to regulate and supervise the NBFC has been enhanced by various amendments to the act later on.