What Happened
- The Reserve Bank of India released draft amendment directions on April 10, 2026, proposing significant changes to the Scale-Based Regulation (SBR) framework for Non-Banking Financial Companies (NBFCs).
- The existing two-pronged methodology for identifying NBFCs in the Upper Layer (NBFC-UL) — comprising "top ten eligible NBFCs by asset size" and a "parametric scoring methodology" — is proposed to be replaced with a single, transparent criterion: an asset size of ₹1,00,000 crore (₹1 lakh crore) and above.
- Government-owned NBFCs, currently placed only in the Base or Middle Layers, are proposed to be made eligible for Upper Layer classification, in line with the principle of ownership-neutral regulation.
- All NBFC-UL entities would be permitted to use State Government guarantees as credit risk transfer instruments, without any upper limit, subject to specified conditions.
- Public comments are invited via the RBI's "Connect 2 Regulate" portal until May 4, 2026.
Static Topic Bridges
NBFC Scale-Based Regulation (SBR) Framework — Structure and Rationale
The Scale-Based Regulation (SBR) framework for NBFCs was introduced by the RBI in October 2021 (notified in November 2021, effective October 2022). It replaced the earlier approach of regulating all NBFCs under a largely uniform framework, regardless of their size or systemic importance. The SBR framework categorises NBFCs into four layers based on their size, activity, and risk profile.
- Base Layer (NBFC-BL): Non-deposit-taking NBFCs with assets below ₹1,000 crore; also includes NBFC-P2P lending platforms and account aggregators. Lightest regulation.
- Middle Layer (NBFC-ML): All deposit-taking NBFCs (regardless of size) + non-deposit-taking NBFCs with assets of ₹1,000 crore and above. Holds 64.6% of total NBFC assets.
- Upper Layer (NBFC-UL): NBFCs specifically identified by RBI as warranting enhanced regulatory scrutiny; subject to banking-like regulations including capital requirements similar to banks. Holds 30.2% of total NBFC assets.
- Top Layer (NBFC-TL): NBFCs flagged for extreme supervisory concern; ideally kept empty. The framework envisages stringent engagement if any NBFC enters this layer.
- The framework is progressive — regulations applicable to lower layers automatically apply to higher layers.
Connection to this news: The proposed amendment simplifies Upper Layer identification from a complex scoring system to an absolute asset-size threshold of ₹1 lakh crore — improving regulatory predictability and transparency.
NBFCs in India — Definition, Importance, and Regulation
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act that carries out financial business (lending, investment, hire-purchase, etc.) but is NOT a bank. NBFCs are regulated by the RBI under Chapters III-B and III-C of the RBI Act, 1934.
- NBFCs differ from banks in that they cannot accept demand deposits, cannot issue cheques drawn on themselves, and are not part of the payment and settlement system.
- There are over 9,000 registered NBFCs in India; the sector holds assets exceeding ₹60 lakh crore.
- NBFCs serve credit-underserved segments: vehicle finance, microfinance, housing finance, gold loans — areas where banks have limited penetration.
- Key NBFC categories: NBFC-Investment and Credit Companies (NBFC-ICC), Housing Finance Companies (HFC), Microfinance Institutions (NBFC-MFI), Infrastructure Finance Companies (NBFC-IFC).
- HFCs were brought under RBI regulation in 2019 (previously under NHB).
Connection to this news: Bringing government-owned NBFCs under the Upper Layer framework is significant because large PSU NBFCs (such as Power Finance Corporation, REC Limited) have massive balance sheets and systemic importance comparable to private-sector NBFC-ULs.
Ownership-Neutral Regulation — Principle and Implications
Ownership-neutral regulation means that the regulatory requirements applicable to an entity are determined by its function, size, and risk — not by its ownership structure (government vs. private). This principle is aligned with global regulatory best practices and RBI's philosophy that publicly-owned entities should not receive implicit regulatory forbearance.
- The existing SBR framework excluded government-owned NBFCs from the Upper Layer, creating a de facto regulatory advantage for them.
- Large PSU NBFCs such as Power Finance Corporation (PFC) and REC Limited (formerly Rural Electrification Corporation) have asset sizes well above the proposed ₹1 lakh crore threshold.
- Ownership-neutral regulation prevents regulatory arbitrage, where entities structure themselves to exploit ownership-based exemptions.
Connection to this news: The RBI's proposal to include eligible government NBFCs in the Upper Layer directly implements the ownership-neutral principle — subjecting them to the same enhanced regulatory scrutiny as private-sector peers of comparable size.
Credit Risk Transfer and State Government Guarantees
Credit risk transfer (CRT) refers to mechanisms by which a lender transfers the risk of borrower default to a third party. State government guarantees are one such instrument — where a state government promises to honour a borrower's obligations if the borrower defaults, reducing the lender's risk weight on that exposure.
- Currently, NBFC-UL entities face restrictions on using State Government guarantees as CRT instruments — the proposed amendment would remove these limits, subject to conditions.
- State government guarantees improve the risk profile of infrastructure and development-sector lending, potentially lowering the cost of capital for state-linked projects.
- Excessive reliance on government guarantees can also create contingent fiscal liabilities for state governments — a risk the RBI is expected to address through "specified conditions."
Connection to this news: Allowing NBFC-ULs (including PSU NBFCs) to use State Government guarantees without a cap could significantly expand their lending capacity to infrastructure projects, supporting India's capital expenditure pipeline.
Key Facts & Data
- Proposed NBFC-UL threshold: ₹1,00,000 crore (₹1 lakh crore) in assets.
- Comment deadline: May 4, 2026 via "Connect 2 Regulate" portal.
- SBR framework notified: November 2021; effective October 2022.
- Four NBFC layers: Base, Middle, Upper, Top.
- Upper Layer holds ~30.2% of total NBFC assets; Middle Layer holds ~64.6%.
- RBI regulates NBFCs under Chapters III-B and III-C of the RBI Act, 1934.
- Key PSU NBFCs likely affected: Power Finance Corporation, REC Limited (assets well above ₹1 lakh crore).