Non deposit taking NBFCs will continue to be under RBI purview says central bank in draft norms

RBI Clarifies Stance on NBFC Regulation in New Draft Guidelines

The Reserve Bank of India has released draft guidelines that bring important clarity to the regulation of non-deposit taking non-banking financial companies, or NBFCs. These companies, which do not accept deposits from the public, will continue to fall under the central bank's purview, even if they qualify for an exemption from mandatory registration. This move comes as part of efforts to ease compliance burdens for smaller players while safeguarding the broader financial system. The draft norms, open for public feedback until early March, emphasize that the exemption applies only to the registration process itself, not to overall supervision.

RBI's proposal targets NBFCs with assets under Rs 1,000 crore that neither access public funds nor engage directly with customers. Such firms can apply for deregistration if they meet strict criteria, including submitting audited financials for the past three years and a board resolution affirming no future plans for public funds or customer dealings. This is aimed at reducing red tape for low-risk entities that primarily invest their own capital, posing minimal systemic threats.

What Qualifies as Low-Risk NBFCs Under the New Framework?

To qualify, these NBFCs must prove they have no customer interface, which includes activities like lending, issuing guarantees, distributing mutual funds, or handling credit cards. Even loans from directors or shareholders count as public funds, disqualifying a firm. Customer-oriented services to group entities or individuals also bar exemption. RBI categorizes these as 'Unregistered Type I NBFCs,' effective from April 1, 2026, under amendments to the Scale Based Regulation framework.

Existing registered NBFCs meeting the criteria have a six-month window from April 1 to seek deregistration. New entities must adhere to annual board resolutions and disclosures in financial statements confirming their status. Auditors play a key role, required to report any violations directly to RBI. This setup ensures ongoing compliance without full registration.

"These NBFCs operate without accessing public funds and without customer interface, and their asset size is less than Rs 1,000 crore, due to which regulatory concerns on systemic risk and customer protection are minimal," an RBI official explained in the draft guidelines.

Balancing Ease of Business with Prudential Oversight

While the exemption promises lighter compliance, RBI retains full authority to intervene if risks emerge. All NBFCs, registered or not, must follow anti-money laundering rules. Firms exceeding Rs 1,000 crore in assets or shifting to public funds or customer activities must register as Type II NBFCs or face penalties. This aligns with RBI's scale-based approach, layering regulations by size, activity, and risk—base layer for smallest, up to top layer for systemically important ones.

Industry observers see this as a pragmatic step. Smaller NBFCs, often family-owned or investment-focused, gain flexibility without evading scrutiny. Yet, the central bank stresses that exemption is conditional; any breach triggers action. Public comments are invited until March 4, potentially refining these norms before finalization.

The draft also ties into broader monetary policy shifts announced last week, signaling RBI's push for a more nuanced regulatory environment. By exempting low-risk players, the bank aims to foster growth among genuine small-scale financiers while protecting against hidden vulnerabilities.

In essence, RBI's draft norms offer relief from registration hassles but reinforce that non-deposit taking NBFCs stay firmly under its watchful eye. This dual approach—deregulation where safe, supervision where needed—underpins financial stability in India's evolving NBFC sector. Stakeholders await the final directions, expected to shape operations for hundreds of such firms.