India's central bank proposes new approach to regulating NBFCs

The Reserve Bank of India on Jan. 22 released a discussion paper proposing a four-tiered, scale-based structure for the regulation of non-banking financial companies, or NBFCs.

The move comes as the central bank argued that NBFCs' higher risk appetite over the years "has contributed to their size, complexity and interconnectedness making some of the entities systemically significant, posing potential threat to financial stability."

The central bank said it has become essential to reexamine the suitability of the existing regulatory approach to NBFCs, considering the possibility that a failure of a big company can bring about systemic risks and the fact that it needs to keep pace with the financial sector.

Under the proposed structure, the base layer will consist of non-systemically important NBFCs, nonoperative financial holding companies, peer-to-peer lending platforms and account aggregators with assets of up to 10 billion rupees, the RBI said. The middle layer will consist of firms classified currently as non-banking financial companies - systemically important non-deposit taking companies.

The upper layer will consist only those NBFCs specifically identified as systemically significant. It could include as many as 30 systemically significant NBFCs, which will be regulated like banks.

The central bank also proposed to have a top layer that is supposed to remain empty. "The layer can get populated in case the Reserve Bank [of India] takes a view that there has been unsustainable increase in the systemic risk spill-overs from specific NBFCs in the Upper Layer," it said.

As of Jan. 22, US$1 was equivalent to 72.98 Indian rupees.