RBI's Proposed Overhaul of Upper Layer NBFC Classification

The Reserve Bank of India (RBI) has suggested a major revision in how "upper layer (UL)" non-banking financial companies (NBFCs) are classified, with a focus on asset size as the key criterion. This draft proposal arises amidst discussions about the potential stock exchange listing of Tata Sons, which was earlier mandated by the RBI to list by 2025.

Key Proposals and Criteria

• NBFCs with assets of ₹1 trillion or more, according to their latest audited balance sheet, would be categorized as "upper layer" entities.
• State-backed NBFCs meeting the threshold will also be included in this category, shifting from their current base or middle layer classification.
• Entities once classified as NBFC-UL will face enhanced regulatory requirements for a minimum of five years, even if they drop below the threshold later.
• Public comments on these draft directions are invited until May 4.

Current and Potential Upper Layer NBFCs

• Currently, there are 15 NBFCs in the upper layer, including Bajaj Finance, Shriram Finance, and Tata Sons.
• Government-owned entities might increase this number if included based on the new criteria.
• The existing classification system involves a scoring model with 70% quantitative and 30% qualitative parameters.
• The RBI aims to simplify this with a transparent asset size criterion of ₹1 trillion and above.

Implications and Industry Reactions

• AM Karthik from ICRA notes that the shift to a size-based threshold provides clarity and could harmonize NBFC classification.
• Some current UL-NBFCs do not meet the proposed asset size criterion but will remain under enhanced regulation for at least five years.
• The change is largely seen as a governance measure without operational advantages, requiring high standards like additional capital and key roles.
• Industry insiders view the move as simplification, with size being prioritized over previous mixed criteria.

Uncertainty and Future Considerations

• Questions remain about entities like Tata Sons that are structurally distinct and have requested listing exemptions.
• For NBFCs below the ₹1 trillion mark currently in the upper layer, the previous framework's norms might still apply.

Potential New Entrants

NBFCs with over ₹1 trillion in assets but not currently part of the upper layer include:

• Power Finance Corporation (₹11.2 trillion)
• REC (₹5.7 trillion)
• Bajaj Finserv (₹4.8 trillion)
• IRFC (₹4.6 trillion)
• Cholamandalam Financial Holdings (₹2.01 trillion)
• Jio Financial Services (₹1.2 trillion)
• Housing & Urban Development Corporation (₹1.2 trillion)

Overview of Current UL-NBFCs

• Upper-layer NBFCs on the 2024-25 list include various deposit-taking and non-deposit-taking housing finance companies and investment and credit companies.
• Tata Sons is noted as the only core investment company with ₹6.64 trillion in assets.
• Some NBFCs below the ₹1 trillion asset size but on the list include PNB Housing Finance, Piramal Finance, and Sammaan Capital.