Scale-Based Regulation (SBR) is a revised regulatory framework introduced by the Reserve Bank of India (RBI) for Non-Banking Financial Companies (NBFCs) in India. The framework aims to provide a more nuanced regulatory approach that takes into account the size and complexity of NBFCs and the risks they pose to the financial system.
Under the SBR framework, NBFCs are classified into four categories based on their size and systemic risk profile. The categories are as follows:
- Base Layer: NBFCs with assets less than or equal to Rs. 1000 crore are classified as Base Layer NBFCs. These NBFCs are subject to the least stringent regulatory requirements and are required to maintain a minimum CRAR of 15%.
- Middle Layer I: NBFCs with assets between Rs. 1000 crore and Rs. 5000 crore are classified as Middle Layer I NBFCs. These NBFCs are subject to higher regulatory requirements than Base Layer NBFCs and are required to maintain a minimum CRAR of 15%.
- Middle Layer II: NBFCs with assets between Rs. 5000 crore and Rs. 10,000 crore are classified as Middle Layer II NBFCs. These NBFCs are subject to even higher regulatory requirements than Middle Layer I NBFCs and are required to maintain a minimum CRAR of 15%.
- Upper Layer: NBFCs with assets greater than Rs. 10,000 crore are classified as Upper Layer NBFCs. These NBFCs are subject to the most stringent regulatory requirements and are required to maintain a minimum CRAR of 18%.
The SBR framework also provides for differential regulation of certain types of NBFCs, such as those engaged in core investment activities, those with high interconnectedness with the financial system, and those with complex business models.
The key features of the SBR framework are as follows:
- Risk-Based Supervision: The SBR framework is based on a risk-based supervision approach, which allows for a more nuanced regulatory approach based on the size and complexity of NBFCs.
- Gradual Increase in Regulatory Requirements: The SBR framework provides for a gradual increase in regulatory requirements as the size and systemic risk profile of NBFCs increase.
- Differential Regulation: The SBR framework allows for differential regulation of certain types of NBFCs based on their business models and systemic risk profile.
- Strengthened Governance and Risk Management: The SBR framework requires NBFCs to strengthen their governance and risk management practices, including the establishment of independent risk management functions and the implementation of robust internal controls.
In conclusion, the Scale-Based Regulation (SBR) framework is a revised regulatory framework introduced by the RBI for NBFCs in India. The framework provides for a more nuanced regulatory approach based on the size and complexity of NBFCs and the risks they pose to the financial system. The SBR framework is based on a risk-based supervision approach and provides for a gradual increase in regulatory requirements as the size and systemic risk profile of NBFCs increase. The framework also allows for differential regulation of certain types of NBFCs based on their business models and systemic risk profile and requires NBFCs to strengthen their governance and risk management practices.