What Happened
- The Reserve Bank of India invited public comments on draft Amendment Directions to exempt certain NBFCs from mandatory registration under the RBI Act.
- NBFCs that do not avail public funds, do not have a customer interface, and have an asset size below Rs. 1,000 crore will be exempted from the registration requirement with the RBI.
- These NBFCs will be tagged as "Unregistered Type I NBFCs," while those with assets of Rs. 1,000 crore or more must register as "Type I NBFC," and those accessing public funds or having customer interface must register as "Type II NBFC."
- The directions include procedures for deregistration of existing NBFCs meeting the exemption criteria, including current Type I NBFC holders, with a deregistration window by September 30, 2026.
- Public comments are invited until March 4, 2026, with the directions set to take effect from April 1, 2026.
Static Topic Bridges
Scale Based Regulation (SBR) Framework for NBFCs
The RBI introduced the Scale Based Regulation (SBR) framework for NBFCs through a circular dated October 22, 2021, replacing the earlier asset-based classification with a four-layered regulatory structure based on the size, activity, and perceived riskiness of NBFCs.
- Base Layer (NBFC-BL): NBFCs with asset size up to Rs. 1,000 crore, non-deposit taking, and without systemic importance. Also includes Type I NBFCs (no public funds, no customer interface), NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface. Subject to the lightest regulatory requirements.
- Middle Layer (NBFC-ML): All deposit-taking NBFCs regardless of size, non-deposit taking NBFCs with assets of Rs. 1,000 crore and above, NBFCs undertaking specific activities (NBFC-HFC, NBFC-IFC, NBFC-IDF, CICs). Subject to enhanced regulations including NPA classification norms and board-level governance requirements.
- Upper Layer (NBFC-UL): Top 10 NBFCs by asset size, plus any NBFC specifically identified by RBI based on a set of parameters. Subject to bank-like regulatory requirements including additional CET1 capital requirements.
- Top Layer (NBFC-TL): Ideally empty; populated only if RBI perceives specific NBFCs in the Upper Layer pose extreme systemic risk. Subject to the most stringent regulations.
Connection to this news: The proposed exemption further calibrates the Base Layer of the SBR framework by recognizing that NBFCs without public funds and without customer interface (essentially holding companies, investment vehicles, or intra-group entities) have minimal systemic risk and do not warrant the regulatory burden of RBI registration.
NBFC Registration Under Section 45-IA of the RBI Act, 1934
Section 45-IA of the Reserve Bank of India Act, 1934 (inserted by the RBI Amendment Act, 1997) mandates that no company can commence or carry on the business of a non-banking financial institution without obtaining a Certificate of Registration (CoR) from the RBI. This registration requirement was introduced after several NBFC failures in the 1990s exposed depositors to significant losses.
- Minimum net owned fund (NOF) requirement: Rs. 2 crore for new NBFC registrations (enhanced from Rs. 25 lakh through phased increases).
- RBI has powers under Section 45-IA(6) to cancel registration if an NBFC ceases to carry on NBFC business, fails to comply with conditions, or if it is in public interest.
- Section 45NC empowers the RBI to exempt specific categories of NBFCs from provisions of Sections 45-IA, 45-IB, and 45-IC.
- Currently registered NBFCs in India: approximately 9,300+ (as of recent RBI data), of which a significant proportion are Type I NBFCs with minimal activity.
Connection to this news: The proposed amendment leverages Section 45NC to create a formal exemption from Section 45-IA registration for small NBFCs without public funds and customer interface, reducing regulatory burden while maintaining oversight of systemically relevant entities.
Classification of NBFCs — Activity-Based and Size-Based
The RBI classifies NBFCs based on both the type of activity they undertake and their size. This dual classification framework determines the applicable regulatory requirements.
- Activity-based classification: NBFC-Investment and Credit Company (NBFC-ICC), NBFC-Infrastructure Finance Company (NBFC-IFC), NBFC-Micro Finance Institution (NBFC-MFI), NBFC-Infrastructure Debt Fund (NBFC-IDF), Core Investment Company (CIC), Housing Finance Company (HFC), NBFC-Account Aggregator (NBFC-AA), NBFC-P2P Lending Platform.
- Size-based classification (SBR): Base Layer, Middle Layer, Upper Layer, Top Layer.
- Public funds include: deposits, bank borrowings, debentures, commercial papers, inter-corporate deposits from public, and any borrowing from the financial system.
- Customer interface includes: any activity involving direct interaction with customers for financial products or services.
- Type I NBFCs (no public funds, no customer interface) are predominantly holding companies, investment companies, and intra-group lending entities.
Connection to this news: The draft amendment creates a new regulatory category — "Unregistered Type I NBFC" (assets below Rs. 1,000 crore, no public funds, no customer interface) — that will be fully exempt from registration, while those above Rs. 1,000 crore will continue as registered "Type I NBFC" and those accessing public funds or serving customers must convert to "Type II NBFC."
Key Facts & Data
- Asset size threshold for exemption: Rs. 1,000 crore
- Draft directions effective date: April 1, 2026
- Comments deadline: March 4, 2026
- SBR Framework introduction: October 22, 2021
- Deregistration window: by September 30, 2026 (six months from effective date)
- Registration requirement statutory basis: Section 45-IA, RBI Act 1934
- Exemption power statutory basis: Section 45NC, RBI Act 1934
- Minimum NOF for new NBFC registration: Rs. 2 crore
- Number of registered NBFCs in India: approximately 9,300+
- SBR layers: Base Layer, Middle Layer, Upper Layer, Top Layer (four layers)