Context: Reserve Bank of India (RBI) has issued draft guidelines to revise the methodology for identifying NBFC-Upper Layer (NBFC-UL) entities and invited public comments. The proposal aims to simplify classification using asset-size criteria and may include government-owned NBFCs under stricter regulatory oversight.
- Non-Banking Financial Companies (NBFCs) are financial institutions registered under the Companies Act, 1956/2013, providing banking-like services – loans, investments, and leasing – without holding a full banking license.
- Regulated by the RBI, they focus on niche markets, infrastructure financing, and microfinance, filling credit gaps where traditional banks may not reach.
- NBFCs play a major role in credit delivery, especially to MSMEs, infrastructure, and informal sectors, making them systemically important.
- RBI introduced the Scale-Based Regulation (SBR) framework in 2021, classifying NBFCs into Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL) based on size, activity, and perceived riskiness.
- NBFC-UL includes large entities with higher systemic risk and is subjected to bank-likeregulations such as stricter capital norms and governance requirements.
- The objective is to ensure financial stability, reduce systemic risk, and strengthen oversight of large shadow banking institutions.
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