Non-banking financial companies (NBFCs) will be under tighter regulations as the Reserve Bank of India (RBI) finalised its set of revised rules so that they can be better monitored and collapses prevented.

The new scale-based regulations, needed after the fall of the Infrastructure Leasing & Financial Services (IL&FS) in late 2018, Dewan Housing Finance Corp and Altico Capital in 2019 and Srei Infrastructure Finance this year, will come into effect from October 1, 2022.

"Many entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile," the RBI said.

The NBFC sector, pegged at Rs 54 lakh crore, will come under a four-tiered regulatory structure based on their size, activity and perceived riskiness. Only about 30 of the more than 9,000 NBFCs will fall under the top two tiers where the strictest regulations apply. 

NBFCs in the lowest layer will be known as NBFC-Base Layer, while those in the middle layer and upper layer will be known as NBFC-Middle Layer and NBFC-Upper Layer respectively. The Top Layer is ideally expected to be empty and will be known as NBFC-Top Layer.

"The top layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the upper layer. Such NBFCs shall move to the top layer from the upper layer," RBI said.

The upper layer NBFCs will face the strictest regulatory requirements based on a set of parameters and scoring methodology. The top ten eligible NBFCs in terms of their asset size will always reside in the upper layer, irrespective of any other factor, the RBI said.

The middle layer will consist of all deposit-taking NBFCs irrespective of asset size, non-deposit taking NBFCs with asset size of Rs 1,000 crore and above, and NBFCs undertaking activities like primary dealership, infrastructure debt funds, core investment companies, housing finance companies and infrastructure finance companies.

The base layer will have non-deposit taking NBFCs with less than Rs 1,000 crore in assets. This category of NBFCs, which include peer-to-peer lending, account aggregators and non-operative financial holding firms, have a different risk profile and need different regulatory treatment.

Under the new regulatory framework, the RBI has tweaked the non-performing asset (NPA) classification to more than 90 days for all categories of NBFCs.

The RBI also said that exposure to capital markets, both directly and indirectly, as well as to commercial real estate will be treated as sensitive areas for NBFCs. Board-approved internal limits need to be fixed for such exposures separately.

The RBI set a ceiling of Rs 1 crore per borrower for financing subscriptions to initial public offerings (IPO). Individual NBFCs can fix more conservative limits if they want. The IPO funding ceiling will come into effect from April 1 next year, the central bank said.