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Reserve Bank of India (RBI) Issues New Guidelines NBFC –  SBR Master Directions 2023

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Master Direction – Reserve Bank of India NBFC Directions, 2023Reserve Bank of India (RBI) has recently published a new set of guidelines called the “Master Direction – Reserve Bank of India [Non-Banking Financial Company (NBFC)– Scale Based Regulation(SBR)] Directions, 2023”.

It replaces the Non-Banking Financial Company–Non-Systemically Important Non-Deposit taking (Reserve Bank) Directions, 2016, and the Non-Banking Financial Company–Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

  • The Reserve Bank of India (RBI) exercises its authority under the RBI Act, 1934 (Act 2 of 1934) and the Factoring Regulation Act, 2011 (Act 12 of 2012).

About the Framework:

Under this regulatory framework, NBFCs are categorized into 4 layers based on their size, activities, and perceived risk:

i.NBFCs-Base Layer (NBFCs-BL) includes:

  • Non-deposit taking NBFCs with assets below Rs 1,000 crore.
  • NBFCs engaged in specific activities such as NBFC-Peer to Peer Lending Platform (NBFC-P2P), NBFC-Account Aggregator (NBFC-AA), Non-Operative Financial Holding Company (NOFHC), and NBFCs not utilizing public funds and lacking customer interactions.

ii.NBFCs-Middle Layer (NBFCs-ML) includes:

  • All deposit-taking NBFCs (NBFCs-D), regardless of their asset size
  • Non-deposit taking NBFCs with assets equal to or exceeding Rs 1,000 crore
  • NBFCs involved in activities like Standalone Primary Dealer (SPD), Infrastructure Debt Fund-Non-Banking Financial Company (IDF-NBFC), Core Investment Company (CIC), Housing Finance Company (HFC), and Non-Banking Financial Company-Infrastructure Finance Company (NBFC-IFC).

Criteria for deciding NBFC-ML status

When the total assets of an NBFC reach Rs 1,000 crore or more, it will become subject to the regulatory requirements that apply to the Middle Layer, regardless of its size as reported on the last balance sheet date.

iii.NBFCs-Upper Layer (NBFCs-UL)

NBFCs that the Reserve Bank identifies as needing stricter regulatory oversight based on specific parameters and scoring methods.

  • The quantitative and qualitative parameters shall have weightage of 70% and 30% respectively.

Scoring methodology for identification of an NBFC as NBFC-UL shall be based on the set of NBFCs fulfilling the following criteria:

  • Top 50 NBFCs (excluding top ten NBFCs based on asset size, which automatically fall in the Upper Layer) based on their total exposure including credit equivalent of off-balance sheet exposure.
  • NBFCs designated as NBFC-UL in the previous year.
  • NBFCs added to the set by supervisors using supervisory judgment

iv.NBFCs-Top Layer (NBFC-TL) 

The Top Layer should remain vacant.

  • If the Reserve Bank determines that certain NBFCs in the Upper Layer pose a substantial systemic risk, they may be moved to the Top Layer from the Upper Layer.

Classification of NBFC under activity based

As the regulatory structure envisages scale based as well as activity-based regulation, the following prescriptions shall apply in respect of the NBFCs.

i.NBFC-P2P, NBFC-AA, NOFHC, and NBFCs without public funds and customer interaction will consistently fall within the Base Layer of the regulatory structure.

ii.NBFC-D, CIC, NBFC-IFC, and HFC will be categorized in either the Middle Layer or Upper Layer, as appropriate, excluding the Base Layer. SPD and IDF-NBFC will always remain in the Middle Layer.

iii.The remaining NBFCs, such as NBFC-Investment and Credit Companies (NBFCICCs), NBFC-Micro Finance Institutions (NBFC-MFIs), NBFC-Factors, and Mortgage Guarantee Companies (MGCs), may be positioned in any of the regulatory layers based on scale-related criteria.

iv.Government-owned NBFCs will be positioned in either the Base Layer or Middle Layer, and they will not be placed in the Upper Layer unless otherwise notified.

Multiple NBFCs in a Group – Classification in Middle Layer

For NBFCs that are owned by a common group of promoters, or if they are part of the same group, the total assets of all these NBFCs will be combined to determine their Middle Layer classification.

If the combined assets amount to Rs 1,000 crore or more, each individual NBFC within the group will be categorized as Middle Layer NBFCs.

RBI asks CICs to send alerts to customers when their credit information report is accessed by lenders 

Following the April 2023 Statement on Developmental and Regulatory Policies, the Reserve Bank of India is mandating Credit Information Companies (CICs) and Credit Institutions (CIs) to enhance customer service and grievance redress mechanisms, pursuant to Section 11(1) of the Credit Information Companies (Regulation) Act, 2005:

Notification of Credit Information Report Access and Credit Information Updates:

i.CICs must send SMS/email alerts to customers when their Credit Information Report (CIR) is accessed by Specified Users (SUs) as defined by CICRA, 2005, if mobile numbers or email addresses are available.

ii.CIs should send alerts via SMS/email to customers when reporting default or Days Past Due (DPD) information to CICs, provided mobile numbers or email addresses are available.

iii.A modified Uniform Credit Reporting Format has been introduced to enable these alerts.

Establishment of Nodal Points/Officials by CIs:

i.CIs must designate a dedicated nodal point/contact person for communication with CICs for addressing customer grievances. Contact details, including email ID and phone/mobile numbers, should be provided to CICs.

ii.Any changes in the nodal points/officials must be promptly communicated to CICs within 5 calendar days.

Access to Free Full Credit Report by Individuals:

CICs should provide individuals with easy access to a Free Full Credit Report (FFCR) including their credit score once a year. This access should be prominently displayed on their website’s homepage.

These directions will be effective 6 months from the date of this circular, and CICs and CIs are expected to establish the necessary systems and processes to comply with these directions within this time frame.

  • Failure to adhere to these directions may result in penalties under CICRA, 2005.

Note: RBI announced that CICs will soon have to compensate clients for delays in updating or correcting their credit information by giving them a daily payment of Rs 100.

About Credit Information Companies:

CICs analyze credit data provided by banks and NBFCs, generating credit scores for individuals and credit rankings for companies, affecting loan accessibility and terms. However, credit scores are not the sole factor influencing loan approvals.

Four CICs in India:

i.CIBIL (Credit Information Bureau Limited): CIBIL, founded in 2000, is India’s first CIC, serving over 900 financial institutions by collecting and providing credit reports and scores for individuals, essential for loan and credit card approvals.

ii.Equifax: Founded in 1899 in Atlanta, Equifax is one of the oldest CICs. It received its ‘Certificate of Registration’ in India from the RBI in 2010. Equifax has a specialized bureau dedicated to addressing the needs of Microfinance Institutions.

iii.Experian: Experian CIC was established as a joint venture with several banks and financial institutions in India in 2006. It was recognized as one of the ‘World’s most innovative companies‘ by Forbes magazine in 2014.

iv.High Mark Credit Information Services: Founded in Mumbai in 2005, CRIF High Mark provides credit reports to a wide range of borrower segments, including SMEs, commercial borrowers, and retail borrowers, for a nominal fee.