RBI's New NBFC Framework: ₹1 Lakh Crore Asset Size Defines Upper Layer

Introduction

The Reserve Bank of India (RBI) has released draft directions to simplify its Scale Based Regulation (SBR) framework for Non-Banking Financial Companies (NBFCs). The most significant proposal is the shift to a clear, asset-based criterion for identifying entities in the 'Upper Layer'. Under the new guidelines, NBFCs with an asset size of ₹1 lakh crore and above will automatically qualify for this category, which is subject to enhanced regulatory oversight. This move replaces the previous complex, scoring-based methodology, aiming to bring more transparency and predictability to the classification process.

Simplifying the Identification Process

Previously, the identification of Upper Layer NBFCs was based on a combination of size and several risk-based parameters evaluated by the RBI. This parametric scoring approach involved a degree of subjectivity. The proposed framework scraps this method in favor of a straightforward, rule-based threshold. By anchoring the classification primarily to asset size, the central bank intends to create a more objective and predictable regulatory environment. While the RBI will continue to identify Upper Layer NBFCs annually, the process will now be driven by this clear financial metric, reducing the discretionary element of the earlier system.

Who Falls into the Upper Layer?

According to the latest 2024-25 list, 15 NBFCs are currently classified in the Upper Layer. This group includes some of the largest and most systemically important financial institutions in the country. The list comprises five deposit-taking entities and ten non-deposit-taking NBFCs.

The deposit-taking NBFCs are:

• LIC Housing Finance
• Bajaj Finance
• Shriram Finance
• Mahindra & Mahindra Financial Services
• PNB Housing Finance Limited

The non-deposit-taking NBFCs include:

• Tata Sons
• Cholamandalam Investment and Finance Company
• L&T Finance
• Aditya Birla Finance
• Tata Capital
• Piramal Capital & Housing Finance
• HDB Financial Services
• Sammaan Capital
• Muthoot Finance
• Bajaj Housing Finance

The classification has significant implications, such as a mandatory IPO listing. This has prompted some companies, like Tata Sons, to actively explore ways to surrender their Upper Layer NBFC registration to avoid this requirement.

Relaxation on State Government Exposures

In a separate but related amendment, the RBI has proposed a significant relaxation for NBFCs regarding their exposures that are backed by state government guarantees. These exposures will now attract a much lower risk weight of 20%. This is a substantial reduction, as a lower risk weight means that NBFCs need to set aside less capital against these loans, effectively making them less costly to hold. Furthermore, the RBI has proposed no cap on the extent to which such exposures can be shifted to the state government's books for risk assessment, a departure from typical concentration risk limits. This move aligns the risk of these exposures closer to that of sovereign debt.

Understanding the Four-Layered Framework

The proposed changes are part of the broader Scale Based Regulation framework, which categorizes NBFCs into four tiers to ensure that regulatory oversight is proportional to their systemic importance.

Regulatory Adjustments Across Tiers

The SBR framework, effective since October 2022, has introduced several changes across the layers to strengthen the sector. For the Base Layer, the threshold for being considered "systemically important" was raised from ₹500 crore to ₹1,000 crore. The minimum Net Owned Fund (NOF) requirement for new NBFCs was increased tenfold from ₹2 crore to ₹20 crore, and the Non-Performing Asset (NPA) classification timeline was tightened from 180 days to 90 days. NBFCs in the Middle and Upper Layers face stricter governance norms, exposure limits, and capital adequacy requirements, bringing them closer to the standards applied to commercial banks.

Rationale and Market Impact

The primary driver behind this regulatory overhaul is the RBI's goal to enhance financial stability and reduce regulatory arbitrage between banks and large NBFCs. The collapse of a major institution like IL&FS in 2018 highlighted the systemic risks that large, interconnected NBFCs can pose. By subjecting the largest players in the Upper Layer to bank-like regulations, including mandatory listing and higher capital buffers like a 9% Common Equity Tier 1 (CET 1) capital requirement, the central bank aims to build a more resilient financial system. The simplification of the classification criteria is a step towards making this framework more transparent and efficient. The periodic review mechanism, with the asset size threshold set for re-evaluation every five years, ensures that the framework remains relevant to the evolving financial landscape.

Conclusion

The RBI's draft proposal to use a ₹1 lakh crore asset size as the primary determinant for classifying Upper Layer NBFCs marks a significant move towards a more transparent and rules-based regulatory regime. This change, coupled with relaxations on state-guaranteed exposures, simplifies compliance for NBFCs while ensuring that the largest and most systemically important players are subject to stringent, bank-like oversight. The framework aims to balance financial stability with the operational flexibility of the NBFC sector, learning from past crises to build a more robust financial ecosystem.