RBI proposes exempting small NBFCs not dealing with public from registration

Mumbai: The Reserve Bank of India (RBI) has proposed exempting smaller non-bank lenders that do not take public funds or deal directly with customers from registering with the central bank to ease operational compliance.

“Considering their peculiar business model and lower risk profile, it has been decided that the ‘NBFCs (non-banking financial companies) not availing public funds and not having customer interface’, with asset size of less than ₹1,000 crore, shall be exempted from registration requirement with the RBI, duly subject to the conditions as specified by the RBI,” it said.

The draft will be open for feedback and comments until 4 March.

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The banking regulator, along with the outcome of the monetary policy review, announced on 6 February that it plans to exempt eligible NBFCs from registration. The central bank had also done away with the requirement for large gold loan NBFCs to seek prior approval for branch expansion.

These announcements will reduce compliance friction for NBFCs, allowing more management bandwidth to be devoted to credit delivery and risk management, Umesh Revankar, executive vice chairman at Shriram Finance Ltd, had said on 6 February.

In a separate FAQ (frequently asked questions) issued on Tuesday, the RBI clarified that given the type of their operations, regulatory concerns on systemic risk and customer protection issues are not relevant in case of such NBFCs. These lenders typically undertake investments out of their owned funds and, hence, their potential to pose systemic risk is very low.

Filling the gaps

The central bank first introduced the Scale-Based Regulatory Framework (SBR) for NBFCs on 21 October 2021, noting that NBFCs that do not avail public funds and do not have a customer interface have a different risk profile and deserve differential regulatory treatment.

This category was classified as ‘Type 1 NBFCs’ and recognized as ‘base layer’ entities—attracting the most relaxed regulations, with RBI saying that it will issue separate regulations for these NBFCs in due course. Other categories under the framework were ‘middle layer’, ‘upper layer’ and ‘top layer’ NBFCs, depending on the size, scale and type of their operations.

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The exemption proposed in the draft will be applicable to all NBFCs not availing public funds, not having any customer interface and with assets of less than ₹1,000 crore, including those registered with the RBI as ‘Type I NBFCs’. Access to public funds includes indirect receipt of funds-those received through associates and group entities which have access to public funds.

“Any funds received from outside sources and which constitute outside liability are treated as public funds for ‘Type I NBFCs’. As such, loans from directors and/or shareholders will be classified as public funds,” RBI said in the FAQ.

According to the regulator, customer interface means any interaction between an NBFC and its customers through an account-based relationship, a lending relationship, or interactions with customers as part of the business.

“Any customer-oriented activity like lending or providing guarantee, including to ‘entities in the Group’, its shareholders, its directors, or providing any other product or service to a customer would constitute ‘customer interface’,” RBI said, adding however, that loans to employees as per terms of employment and not on commercial terms, shall be excluded from this.

Industry participants believe that the new framework “fills the gap” pending from the 2021 framework and has provided regulatory clarity for such NBFCs.

“This step is expected to enhance ease of doing business and foster a more competitive environment among NBFCs, enabling them to expand their outreach more effectively,” Vinay Pai, managing director and head of Fixed Income, Equirus Group, had said on 6 February.

Eligibility criteria

The norms are proposed to come into effect from 1 April, following which eligible NBFCs will have six months to apply for de-registration until 30 September.

However, to avail the exemption, NBFCs will need to show that they don’t accept public funds, don’t have a customer interface, and don’t intend to do so in the future. The companies will have to furnish the status of public funds and customer interface for the past three financial years, a statutory auditor certification of this, and an annual board resolution stating that it does not intend to violate the requirements in the specified financial year.

The framework also mooted that in case an unregistered NBFC plans to avail public funds or have a customer interface, it will need to register as a ‘Type II’ NBFC. If its asset size exceeds ₹1,000 crore, it will need to register as a ‘Type I’ NBFC.

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“Existing ‘NBFCs not availing public funds and not having any customer interface’ which are not holding Certificate of Registration as ‘Type I NBFC’ shall be ineligible for relaxed regulatory requirements as available to NBFCs holding Certificate of Registration as ‘Type I NBFC’,” the draft said, adding that this will also be applicable to unregistered NBFCs that intend to undertake overseas investment in financial services sector.

As such, the central bank will retain the power to take action against ‘unregistered type I NBFCs’ for violation of any of the provisions applicable, including penal action.