RBI proposes scale-based regulations for shadow banks

The Reserve Bank of India (RBI) has proposed a four-layered structure for regulating non-banking finance companies (NBFCs) aimed at tighter capital, lending and governance norms in order to prevent defaults such as those at Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Corp. Ltd (DHFL). Not more than 25-30 large non-bank lenders will be constituents of the upper levels of the pyramid, according to the RBI discussion paper released on Friday. Norms will get more stringent as the NBFCs get bigger toward the apex. Those in the upper tier could include Housing Development Finance Corp. (HDFC), Bajaj Finance, Shriram Capital, Tata Capital and Mahindra & Mahindra Financial Services. The regulator has sought feedback on the proposals before finalising norms. The discussion paper on a revised regulatory framework for NBFCs outlines a “base layer, middle layer, upper layer and a possible top layer.” No NBFC will be classified in this top layer unless the risk perception rises to an acute level.