The Reserve Bank of India (RBI) recently released the proposed 4-layered framework for the regulation of shadow banks, otherwise known as Non-Banking Financial Companies (NBFCs). This decision was much awaited after the DHFL crisis bottled investments worth approximately Rs 9,000 crore. The pyramid structure will have 4-layers namely Top Layer, Upper Layer, Middle Layer, and Base Layer.
This layer is reserved for any NBFC deemed to be extremely risky or volatile as per the discretion of a dedicated committee or bank supervisors. Admission of NBFC in the top layer enables it for unique regulation steps.
This layer consists of systemically significant NBFCs (NBFC-UL). For an entity to be classified in this category, the NBFC will be processed through a parameter-based analysis in qualitative as well as quantitative terms. The latter holds 70% weightage while qualitative inputs secure 30%. According to the official papers, the upper layer will consist of NBFCs with a high potential of risk spill-over that can impact financial stability. Perhaps, this is why NBFCs in this layer will have an almost regulatory framework for banks.
Middle layer comprises of Systemically Important NBFCs (NBFC-ND-SI), Deposit NBFCs (NBFC-D), Core Investment Companies (CICs), Standalone Primary Dealers (SPDs), Infrastructure Finance Companies (IFCs), Infrastructure Development Funds (IDFs), and Housing Finance Companies (HFCs). “Adverse regulatory arbitrage vis-à-vis banks can be addressed for NBFCs falling in this layer in order to reduce systemic risk spill-over,” read the draft.
The lowest, and safest, layer will include NBFCs based on their assets, liabilities, and systematic importance. Least amount of supervision or regulation from banks, committees, and tribunals are expected in this layer. Base Layer consists of Non-Systemically Important NBFCs (NBFC-ND), Non-Operative Financial Holding Companies (NOFHCs), NBFC- Peer-to-Peer (P2P) Lending Platforms, NBFC-Account Aggregator (AA), and Type-I NBFCs.
The proposed framework is expected to be finalized and implemented in the next few months after considering expert suggestions.