Scale-based regulation
Also called: SBR, NBFC layers · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Scale-based regulation (SBR) is the RBI's framework for NBFCs (non-banking financial companies). It places them in four layers, and rules get stricter as an NBFC's size and systemic importance grow. Systemic importance means how much its failure could hurt the wider financial system. SBR was announced in October 2021 and took effect in October 2022. It followed the IL&FS and DHFL defaults, which showed that large NBFCs can spread stress.
Example
- Base layer: small NBFCs, lightly regulated
- Middle layer: deposit-taking NBFCs and larger non-deposit NBFCs
- Upper layer: NBFCs identified by the RBI. They must list on a stock exchange within 3 years and keep CET1 (the highest-quality capital) of 9%.
- Top layer: ideally empty. It is used only if an upper-layer NBFC becomes a serious risk.
Don't confuse with
- Basel III norms: capital and liquidity standards for banks. SBR is tailored for NBFCs.
Related concepts
- Differentiated banking
- Payments bank
- Small finance bank
- Neobank
- Non-Banking Financial Company
- Shadow banking
- Asset-liability mismatch
- Digital lending