Current Affair 1:

News:

A recent article by the RBI titled ‘Peeling the Layers: A Review of the NBFC Sector in Recent Times’ highlighted that the Non-Banking Financial Companies (NBFCs) remain resilient post introduction of Scale-based Regulation (SBR) in 2022. (https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/04AR20092024DD79E79EE33A49ECB823B0D228350075.PDF)

About report:

Since 1964, NBFCs are being regulated by the Reserve Bank under the provisions of Chapter IIIB of the RBI Act, 1934.

In response to the evolution of the sector over the years, the Reserve Bank has periodically updated the regulations applicable to NBFC.

In 1998, NBFCs were categorised based on acceptance of public deposits, followed by introduction of systemic importance for non-deposit taking NBFCs with asset size of ₹100 crore and above in 2006.

In 2014, new regulations were formulated, wherein, inter alia, threshold for systemic significance was raised from ₹100 to ₹500 crore, investment grade rating became mandatory for asset finance companies to renew existing or accept fresh public deposits.

The most recent overhaul was in the form of Scale-Based Regulation (SBR), which took effect from October 1, 2022. Under this new regulatory framework, NBFCs are placed in any of the four layers (top, upper, middle, and base) based on size, activity, or perceived riskiness.

Each tier is subject to different regulatory requirements, tailored to its size and risk profile.

At present, the top layer is kept vacant, and the Reserve Bank can shift NBFCs from the upper layer to the top layer, for higher scrutiny if required.

NBFCs in the base layer are subject to less stringent regulation than those in middle and upper layers in view of their small size and limited interconnectedness.

Performance of the NBFC Sector: Balance sheet

The NBFC sector continued to exhibit sustained growth during 2023, primarily driven by credit growth even as investments declined. On the liabilities side, borrowings by NBFCs grew at a lower rate than the previous year.

Another important feature of the sector is the relatively low NPA ratio of government-owned NBFCs.

Under the prompt corrective action (PCA) framework, capital and asset quality are the key areas for monitoring the health of NBFCs, and will become applicable for government-owned NBFCs from October 1, 2024. With adequate capital and low NNPA at end-December 2023, these NBFCs are comfortably placed. PCA framework is already effective for other NBFCs since October 1, 2022.

 

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