RBI Revises NBFC Norms

Source: Business Standard

Context

The Reserve Bank of India (RBI) on Wednesday, 24 June 2026 issued revised final norms for the registration of and exemptions to Non-Banking Financial Companies (NBFCs), simplifying the methodology for identifying Upper Layer NBFCs (NBFC-UL) under the Scale-Based Regulation (SBR) framework. The revised norms mandate that NBFCs with an asset size of ₹1 lakh crore (₹1 trillion) and above, based on their latest audited balance sheet, will be classified as Upper Layer entities and subjected to enhanced regulatory oversight. This replaces the earlier parametric scoring methodology (which weighed size + leverage, interconnectedness, complexity, and qualitative factors). The asset-size threshold will be reviewed every three years. The directions come into force with immediate effect. The norms significantly tighten concentration-risk norms for government-owned NBFCs by withdrawing the exemptions previously available to them, bringing them under the same exposure framework applicable to their respective regulatory layers (Base, Middle, or Upper). Existing breaches of exposure limits will be allowed to run off until maturity, but no fresh exposures to such obligors will be permitted. The RBI also introduced new guidelines for NBFCs that are group entities of scheduled commercial banks: where both the NBFC and its parent bank undertake the same financial activity, the NBFC must comply with norms applicable to commercial banks — irrespective of its SBR classification (to prevent regulatory arbitrage); however, such entities will retain their existing layer classification.

The Revised Norms

• Issued by: Reserve Bank of India (RBI).
• Earlier Notification: 28 November 2025.
• Effective: Immediate.

Key Changes

Change	Earlier	Revised (24 June 2026)
Upper Layer Identification	Parametric scoring methodology + Top 10 by asset size	Simple ₹1 lakh crore (₹1 trillion) asset-size threshold
Government-owned NBFC Concentration Risk	Exemptions available	Exemptions WITHDRAWN — same limits as private NBFCs
Bank-Group NBFCs	Regulated as per their SBR layer	Must follow commercial bank norms if same activity as parent bank
NBFC-IFC Large Exposure Limit (Group of Connected Counterparties)	35%	45% of eligible capital base
NBFC-IFC Exposure with State Government Guarantee	Subject to prudential limits	Exempted (20% risk weight)
Review of Asset-Size Threshold	—	Every 3 years
Identification Frequency	—	Annual

Scale-Based Regulation (SBR) Framework

• What: A risk-based regulatory framework for NBFCs introduced by the RBI on 22 October 2021, effective 1 October 2022, that categorises NBFCs into four layers — Base, Middle, Upper, and Top — based on size, activity, and perceived riskiness; aligns regulatory intensity with the systemic significance of each NBFC; calibrates capital requirements, governance standards, prudential regulation, large exposure framework, disclosure norms accordingly.
• Where: Issued by RBI from Mumbai; applicable to all NBFCs registered in India under the RBI Act, 1934.

Four Layers Under SBR Framework

Layer	Asset Size Criteria	Examples
Base Layer (NBFC-BL)	<₹1,000 crore non-deposit-taking	NBFC-P2P, NBFC-AA, NOFHC, NBFCs without public funds
Middle Layer (NBFC-ML)	₹1,000 crore – ₹1 lakh crore	All Deposit-taking NBFCs (NBFC-Ds), CICs, IFCs, HFCs, NBFC-IDF, NBFC-SPD
Upper Layer (NBFC-UL)	≥₹1 lakh crore (₹1 trillion)	Systemically important NBFCs; ~15 entities (incl. Tata Sons, Bajaj Finance)
Top Layer (NBFC-TL)	Discretionary	Ideally empty; populated only if RBI identifies substantial systemic risk in Upper Layer

Newly Revised Upper Layer Criteria

• Asset size ≥ ₹1 lakh crore (₹1 trillion) based on latest audited balance sheet.
• Identified annually.
• Threshold reviewed every 3 years.
• NBFC-UL must list within 3 years of identification.
• Government-owned NBFC-UL exempted from mandatory listing.
• Enhanced regulatory oversight: CET1 capital, LCR, exposure norms, stress tests, disclosures.

Government-Owned NBFCs — Key Changes

Aspect	Earlier	Revised
Placement in Upper Layer	Generally placed in Base or Middle Layer	Can now be in any layer based on asset size
Concentration Norms	Exempted	NOT exempted — same as private NBFCs in respective layer
Mandatory Listing (if in NBFC-UL)	Exempted	Exemption retained (this is one carve-out)
Existing Exposure Breaches	—	Allowed to run off till maturity (no fresh breaches)

Bank-Group NBFCs — New Rule

• Definition: NBFCs that are group entities (subsidiaries, associates) of scheduled commercial banks (SCBs).
• New Rule: If both NBFC and parent bank undertake same financial activity, NBFC must follow commercial bank norms for that activity.
• Layer Retention: NBFC retains its existing SBR layer classification.
• Purpose: Prevent regulatory arbitrage.
• Example: An Infrastructure Debt Fund (IDF) NBFC in a banking group will remain in Middle Layer but must comply with regulations applicable to Upper Layer NBFCs.

Concentration Risk / Exposure Norms (SBR-based)

Layer	Single Counterparty	Group of Connected Counterparties
NBFC-ML	15% of Tier I	25% of Tier I
NBFC-UL	20% of Tier I	25% of Tier I
NBFC-UL (IFC)	25% of Tier I	45% (revised from 35%) of eligible capital base

Infrastructure Finance Company (NBFC-IFC)

• What: An NBFC that deploys at least 75% of its total assets in infrastructure loans; has minimum Net Owned Fund (NOF) of ₹300 crore; minimum CRAR of 15% (Tier I ≥ 10%); has investment grade credit rating from a SEBI-registered CRA; specialises in infrastructure financing for sectors like power, roads, ports, airports, telecom; examples: REC Ltd, Power Finance Corporation (PFC), India Infrastructure Finance Company Ltd (IIFCL), Indian Renewable Energy Development Agency (IREDA), IRFC, L&T Finance.
• Where: Operates pan-India; some are central PSUs (REC, PFC, IRFC under Ministry of Finance/Power/Railways), others are private (L&T Finance).

Core Investment Company (CIC)

• What: An NBFC that holds ≥ 90% of its net assets as investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies; min ₹100 crore asset size; engages in investment activity rather than lending; systemically important if asset size ≥ ₹100 crore and accepts public funds; examples: Tata Sons, Bajaj Holdings & Investment Ltd, L&T Holdings.
• Where: Operates as a holding company under group structures; primary registration under RBI Master Direction — CIC, 2016.

Non-Banking Financial Company (NBFC)

• What: A company registered under the Companies Act, 1956/2013 that engages in lending, investment, hire-purchase, leasing, insurance, chit fund activities, etc. but does NOT hold a banking licence; cannot accept demand deposits; not part of the payment and settlement system; deposit insurance NOT available; regulated by RBI under the RBI Act, 1934 (Chapter III-B); ~9,500 NBFCs registered in India.
• Where: Registered with RBI’s Department of Regulation; operates pan-India (and some abroad through subsidiaries).

Practice MCQs

Q1. With reference to the RBI’s revised NBFC norms issued on 24 June 2026, consider the following statements:

1. NBFCs with an asset size of ₹1 lakh crore (₹1 trillion) and above will be classified as Upper Layer entities.
2. The asset-size threshold for classification will be reviewed every three years.
3. The earlier parametric scoring methodology for identifying Upper Layer NBFCs has been replaced by the simpler asset-size threshold.
4. The new norms abolish the Scale-Based Regulation (SBR) framework entirely.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the new norms refine and simplify the SBR framework, NOT abolish it. The SBR framework remains in force with four layers.)

Q2. With reference to the treatment of government-owned NBFCs under the revised norms, consider the following statements:

1. The exemptions previously available to government-owned NBFCs on concentration risk norms have been withdrawn.
2. Government-owned NBFCs will now have to adhere to concentration limits based on their classification under the SBR framework.
3. Existing breaches of exposure limits will be allowed to run off until maturity.
4. Fresh exposures to such obligors that breach the new limits will continue to be permitted without restriction.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; fresh exposures to such obligors are NOT permitted under the revised norms — only existing breaches are allowed to run off till maturity.)

Q3. With reference to the Scale-Based Regulation (SBR) framework for NBFCs, consider the following statements:

1. The SBR framework was introduced by RBI on 22 October 2021 and came into effect on 1 October 2022.
2. It classifies NBFCs into four layers — Base, Middle, Upper, and Top — based on size, activity, and perceived riskiness.
3. The Top Layer is ideally expected to remain empty.
4. The SBR framework is administered by the Ministry of Finance.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the SBR framework is administered by the Reserve Bank of India (RBI), NOT the Ministry of Finance.)

Q4. With reference to the new rule for NBFCs that are group entities of scheduled commercial banks, consider the following statements:

1. Such NBFCs must comply with norms applicable to commercial banks if both the NBFC and its parent bank undertake the same financial activity.
2. These requirements apply irrespective of the NBFC’s classification under the SBR framework.
3. Such NBFCs will retain their existing SBR layer classification.
4. The new rule aims to encourage regulatory arbitrage between banks and bank-group NBFCs.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the new rule aims to PREVENT (not encourage) regulatory arbitrage between banks and bank-group NBFCs.)

Q5. With reference to the eased exposure norms for Infrastructure Finance Companies (NBFC-IFCs), consider the following statements:

1. The Large Exposure Framework (LEF) limit for NBFC-IFCs has been raised from 35% to 45% of their eligible capital base.
2. Exposures backed by state government guarantees will be treated as exposures to the guaranteeing state government, subject to a 20% risk weight.
3. IFCs may exceed the prescribed exposure limits by up to 20% of their Tier-I capital for such exposures.
4. The relaxation aims to discourage infrastructure financing in India.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the relaxation aims to SUPPORT (not discourage) infrastructure financing in India.)

Q6. With reference to Upper Layer NBFCs (NBFC-UL), consider the following statements:

1. NBFC-ULs must list on stock exchanges within 3 years of their identification.
2. Government-owned NBFC-ULs are exempted from this mandatory listing requirement.
3. Tata Sons, a Core Investment Company (CIC), has sought to deregister as an Upper Layer NBFC to avoid public listing; this decision is pending with RBI.
4. The mandatory listing rule was first introduced after the IL&FS crisis of 2008.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the IL&FS crisis occurred in 2018, NOT 2008, and the mandatory listing rule was introduced as part of the SBR framework in October 2021, not directly after the IL&FS crisis.)

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the SBR framework is not abolished.
2. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because fresh exposures breaching limits are not permitted.
3. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because RBI (not Ministry of Finance) administers SBR.
4. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the rule prevents (not encourages) regulatory arbitrage.
5. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the relaxation supports infrastructure financing.
6. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because IL&FS crisis was in 2018, not 2008.