Definition
NBFC Scale-Based Regulation
Scale-Based Regulation is the RBI's framework that places NBFCs into Base, Middle, Upper and Top layers, with regulation tightening as size and systemic importance rise.
Introduced in 2022, the framework recognises that large NBFCs pose bank-like systemic risk and so deserve bank-like oversight. The Base Layer covers smaller NBFCs with light-touch rules, while the Upper Layer faces stricter capital, governance and disclosure norms, including a common equity requirement.
Upper-Layer NBFCs, identified by the RBI, must meet enhanced standards and may eventually need to list. The framework is the RBI's response to the post-IL&FS recognition that the largest NBFCs are too interconnected with banks and markets to be lightly regulated.
Related terms
- Non-Banking Financial Company (NBFC)An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
- Housing Finance Company (HFC)A Housing Finance Company is an NBFC that primarily provides home loans and related housing finance, now regulated by the RBI.
- Microfinance Institution (MFI)A Microfinance Institution provides small, collateral-free loans to low-income borrowers, typically women in groups, for income-generating activities.
- Asset-Liability MismatchAn asset-liability mismatch arises when the maturity or repricing profile of a lender's assets differs from that of its liabilities, creating liquidity or interest-rate risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.