RBI Proposes Major Regulatory Relief for Smaller Non-Banking Financial Companies
The Reserve Bank of India (RBI) has unveiled a significant regulatory proposal aimed at reducing compliance burdens for smaller non-banking financial companies (NBFCs). The central bank plans to exempt certain NBFCs from mandatory registration requirements, provided they meet specific low-risk criteria.
Exemption Criteria and Rationale
The exemption will apply to NBFCs with asset sizes below ₹1,000 crore that neither accept public funds nor maintain direct customer interfaces. According to the RBI's draft framework, these entities present minimal systemic risk and regulatory concerns regarding customer protection due to their unique business models.
"Considering their peculiar business model and lower risk profile, it has been decided that NBFCs 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," the central bank stated in its announcement.
Background and Regulatory Framework
This proposal builds upon the Scale-Based Regulatory Framework (SBR) introduced in October 2021, which categorized NBFCs into four layers based on size, scale, and operational complexity. The exempted category corresponds to 'Type 1 NBFCs' or 'base layer' entities that were originally designated for the most relaxed regulatory treatment.
The RBI clarified that public funds include any external liabilities, including loans from directors and shareholders, while customer interface encompasses any lending relationships or account-based interactions with customers.
Industry Response and Implementation Timeline
Industry leaders have welcomed the move as a significant step toward reducing compliance friction. Umesh Revankar, executive vice chairman at Shriram Finance Ltd, noted that this would allow NBFCs to devote more management bandwidth to credit delivery and risk management.
Vinay Pai, managing director and head of Fixed Income at Equirus Group, added: "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."
Eligibility Requirements and Transition Process
The proposed norms are scheduled to take effect from April 1, with eligible NBFCs having six months until September 30 to apply for de-registration. To qualify, companies must demonstrate:
- No acceptance of public funds for the past three financial years
- No customer interface during the same period
- No intention to engage in these activities in the future
Applicants must provide statutory auditor certification and annual board resolutions confirming compliance with these requirements.
Regulatory Safeguards and Future Considerations
The framework includes provisions for NBFCs that may later decide to accept public funds or establish customer interfaces. Such entities would need to register as 'Type II' NBFCs, or as 'Type I' NBFCs if their asset size exceeds ₹1,000 crore.
The RBI will retain authority to take action against unregistered NBFCs that violate applicable provisions, including imposing penalties where necessary. The draft framework is open for public feedback and comments until March 4, allowing stakeholders to contribute to the final regulatory approach.
This regulatory development represents a strategic move by the RBI to streamline compliance for low-risk financial entities while maintaining appropriate oversight of the broader financial system.
