Over time, the number of Non-Banking Financial Companies (NBFC) has increased many folds and the sector has evolved in terms of size, operations, complexity and technological sophistications. NBFCs have entered into diverse areas of business and have a complex web of inter-linkages with banks, capital market and other financial sector entities. These deep interlinkages of the NBFC sector within the financial system can also lead to potential systemic risks. Therefore, to protect the deposits placed by investors with NBFCs, there was a need to align the regulations of NBFCs with their changing risk profile. Accordingly, in January 2021, the Reserve Bank of India (RBI) issued a Discussion Paper on Revised Regulatory Framework for NBFCs- A Scale-Based Approach.

In October 2021, RBI finalised and issued the Scale-Based Regulation (SBR). This covers capital requirements, governance standards and prudential regulations for the NBFC sector.

The SBR calibrate the degree of regulatory prescriptions based on the systemic importance of NBFCs and the contagion risk they may pose to other entities in the financial system.

Under the SBR, NBFCs are categorised into four layers – base layer, middle layer, upper layer and a possible top layer.

The SBR framework is likely to have a significant impact on all NBFCs, distinctively to the NBFCs that are classified in the middle and upper layer. It introduces a set of fresh regulations with their respective timelines. Post issue of this regulation, RBI has issued further clarifications over a period from February 2022 to June 2022. However, clarifications on certain matters are still awaited.

This edition of the Accounting and Auditing Update (AAU) is dedicated to NBFCs and the impact of SBR on them. Regulatory requirements introduced by the SBR framework, have been summarised and covered in seven topics e.g. an overview of the SBR, related party provisions, non-performing assets, loans to directors, capital requirements, disclosure requirements and other key provisions of SBR.

The publication also highlights at relevant places the requirements of the Companies Act, 2013 and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 applicable to listed entities in India.

Most of the SBR amendments are applicable from 1 October 2022 or thereafter, however, the amendment pertaining to ceiling on IPO funding is applicable from 1 April 2022.

Our publication also carries a regular synopsis of some recent regulatory updates in India and internationally.

We would be delighted to receive feedback/suggestions from you on the topics we should cover in the forthcoming editions of AAU.

For more information on this update, please write to aaupdate@kpmg.com.

We do hope you find this Update informative and useful.