The Reserve Bank of India (RBI) has put forth a proposal to introduce asset-based criteria for the classification of Public Sector Undertaking (PSU) Non-Banking Financial Companies (NBFCs) into the "upper layer" of its Scale-Based Regulation (SBR) framework. This move indicates a shift towards a more risk-aligned regulatory approach for large government-owned financial entities. The proposal, once finalised, would subject certain PSU NBFCs to enhanced scrutiny and more stringent compliance requirements.

Currently, under the RBI’s SBR framework, all government-owned NBFCs are automatically placed in the "middle layer," irrespective of their asset size. The new proposal aims to review this blanket classification, suggesting that PSU NBFCs with significant asset bases should be elevated to the upper layer, which mandates higher regulatory standards. This adjustment reflects a recognition of the growing size and systemic importance of some PSU NBFCs within India's financial ecosystem.

The SBR framework, introduced by the RBI on October 22, 2021, categorises NBFCs into four layers based on their size, activity, and perceived risk:

  • Base Layer: Comprises non-deposit taking NBFCs with asset sizes below ₹1,000 crore, peer-to-peer lending platforms, and non-operative financial holding companies.
  • Middle Layer: Includes all deposit-taking NBFCs (NBFC-Ds), non-deposit taking NBFCs with asset sizes of ₹1,000 crore and above, Housing Finance Companies (HFCs), Infrastructure Debt Funds (IDFs), and Infrastructure Finance Companies (IFCs). All government-owned NBFCs are currently classified here by default.
  • Upper Layer: Consists of those NBFCs specifically identified by the RBI as warranting enhanced regulatory requirements based on a set of parameters, including asset size, interconnectedness, complexity, and specific activities.
  • Top Layer: This layer is envisioned to remain empty. It could potentially house NBFCs identified by the RBI as posing an extreme supervisory concern, though none have been designated to date.

Should a PSU NBFC be moved to the upper layer under the new asset-based criteria, it would be subject to a range of heightened regulatory measures. These typically include:

  • Increased Capital Adequacy Requirements: Potentially higher Capital to Risk-weighted Assets Ratio (CRAR) than those in the middle layer.
  • Enhanced Governance Norms: More stringent requirements for board composition, risk management committees, and internal audit functions.
  • Stricter Disclosure Requirements: Greater transparency regarding financial health, risk exposures, and corporate governance practices.
  • Implementation of Internal Capital Adequacy Assessment Process (ICAAP): A comprehensive internal process to assess overall capital needs.
  • Chief Risk Officer (CRO) Appointment: Mandatory appointment of a CRO with clearly defined responsibilities.
  • Individual Limits on Exposures: Potential imposition of limits on exposure to single borrowers and groups of borrowers.

The RBI's move is consistent with its broader objective of strengthening the resilience of the financial sector and ensuring that regulatory oversight keeps pace with the evolution of financial institutions. By applying asset-based criteria to PSU NBFCs, the central bank aims to align regulation more closely with the systemic risks these larger entities might pose.

The proposal is currently under consideration, and the RBI is expected to issue detailed guidelines or a final notification following internal deliberations and any potential stakeholder consultations. Financial market participants and PSU NBFCs will closely monitor further announcements from the regulator to understand the precise thresholds and implementation timelines for these potential changes.