Context:
RBI has placed 15 non-banking finance companies (NBFCs) in the Upper Layer (NBFC-UL) under Scale Based Regulations (SBR) for non-bank lenders.
Background:
- In 2021, RBI issued a Scale Based Regulation (SBA) regulatory framework for NBFCs based on their size, activity, and perceived riskiness.
- The frame work takes into consideration of capital requirements, governance standards, and prudential regulation of NBFCs for categorisation.
- Framework categorises NBFCs in 4 layers –
- NBFCs in lower layer will be known as NBFC-Base Layer (NBFC-BL).
- NBFCs in 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).
- A Top Layer, ideally supposed to be empty.
- NBFC-UL are subject to enhanced regulatory requirement, at least for a period of 5 years from its classification in the layer.
- Guidelines in NBFCs lending –
- Aggregate exposure of an upper layer NBFC to any entity must not be higher than 20% of its capital base (board can approve an additional 5%). [For infrastructure finance companies, it is 30% to a single entity.]
- To a group of connected entities, aggregate exposure will be limited to 25% of the capital base for all upper layer NBFCs (35% for infrastructure finance companies).
- Unless sanctioned by the board, mid-layer and upper layer NBFCs shall not lend more than ₹5 crores to directors, CEO or relatives of directors.
- Loans to real estate sector can be provided after prior permission to borrowers from the government or other statutory authorities for the project.
About NBFCs:
- They are registered entities under the Companies Act, 1956.
- It provides bank-like financial services such as loans and advances, acquisition of shares, bonds etc. with no banking licence.
- It does not include institutions with principal business as agriculture activity, industrial activity, trading and purchase or sale of immovable properties.
- NBFCs activities are akin to that of banks; however, there are a few differences like NBFCs:
- Cannot accept demand deposits.
- Do not form part of payment and settlement system
- Cannot issue cheques drawn on itself.
- No deposit insurance facility is available to depositors of NBFCs.
- Primarily, NBFCs are regulated and governed by RBI. (Some NBFCs are regulated by SEBI, IRDAI, National Housing Bank etc.)
Asset Finance Companies (AFC), Loan Companies (LCs) and Investment Companies (ICs) have been merged into a new category called NBFC – Investment and Credit Company (NBFC-ICC).
Source: The Hindu
Previous Year Question
With reference to ‘Urban Cooperative Banks’ in India, consider the following statements:
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
[UPSC Civil Services Exam – 2021 Prelims]
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)
