• The Reserve Bank of India’s (RBI) latest review highlights the continued resilience of the Non-Banking Financial Companies (NBFC) sector under the Scale-Based Regulation (SBR) framework, introduced in October 2022. 

• The sector has seen improvements in asset quality, profitability, and diversification of funding sources.

What is Scale-Based Regulation (SBR)?

• The Scale-Based Regulatory (SBR) framework for NBFCs introduces a more nuanced approach to regulation by categorising NBFCs based on factors like size, riskiness, and the nature of their activities. 

• This allows for a tailored regulatory approach, aiming for enhanced risk management and financial stability in the sector.

Non-Banking Financial Company (NBFC):

• Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business .

• It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. 

• A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Key Features of NBFCs:

• Diverse Financial Services: NBFCs offer a variety of financial services, including personal loans, home loans, vehicle loans, gold loans, microfinance, insurance, and investment management.

• Public Deposits: They can accept public deposits for a minimum of 12 months and a maximum of 60 months but are not allowed to accept demand deposits.

• Limited Role in Payment Systems: NBFCs do not participate in the payment and settlement system, and they cannot issue cheques drawn on themselves.

• Interest Rates: NBFCs must adhere to RBI’s prescribed interest rate ceiling, which currently stands at 12.5 per cent per annum.

• Deposit Insurance: Deposits with NBFCs are not insured, unlike those with banks.

• Regulation Intensity: NBFCs face less stringent regulations compared to banks, but they are subject to oversight by the Ministry of Corporate Affairs and the RBI.

Systemically Important NBFCs:

• NBFCs with assets of Rs 500 crore or more are classified as systemically important, as their activities can impact the stability of the broader economy.

Regulation:

• The Ministry of Corporate Affairs manages corporate governance and other regulatory aspects. 

• The Reserve Bank of India issues licenses, regulates operations, and ensures compliance with norms and guidelines for NBFCs.

(The author is a trainer for Civil Services aspirants.)