What Happened
- The Reserve Bank of India released a draft amendment to its Scale-Based Regulation (SBR) framework, proposing that Non-Banking Financial Companies with assets of ₹1 lakh crore (₹1,00,000 crore) and above be classified as Upper Layer NBFCs (NBFC-UL).
- The proposed change replaces the existing complex two-step methodology — which identified NBFC-ULs using a combination of "top ten by asset size" and a parametric scoring system — with a single, objective, and absolute asset-size criterion.
- Government-owned NBFCs, previously restricted to Base and Middle Layers regardless of size, will now be eligible for Upper Layer classification if their assets cross the ₹1 lakh crore threshold.
- Large PSU NBFCs such as Power Finance Corporation (PFC) and REC Limited, with balance sheets exceeding this threshold, are expected to be brought under enhanced Upper Layer regulations if the proposal is finalised.
- The draft directions also allow all NBFC-ULs to use State Government guarantees as credit risk transfer instruments without any quantitative ceiling (subject to specified conditions).
- Comments invited via RBI's "Connect 2 Regulate" platform until May 4, 2026.
Static Topic Bridges
NBFC Scale-Based Regulation (SBR) — Framework Design and Policy Intent
The SBR framework for NBFCs, introduced in 2021 and effective from October 2022, categorises NBFCs by systemic importance — applying progressively stricter regulations to larger, more interconnected entities. This proportionate approach was adopted after the IL&FS crisis of 2018, which revealed that some large NBFCs had taken on bank-like systemic risk without bank-like regulation.
- Four layers: Base (assets < ₹1,000 crore), Middle (assets ≥ ₹1,000 crore or deposit-taking), Upper (systemically important, enhanced regulation), Top (extreme risk; ideally empty).
- NBFC-UL entities are subject to requirements analogous to Systemically Important Banks: higher capital adequacy, leverage limits, mandatory listing, and stricter corporate governance.
- The SBR framework was a response to the recommendation of the Internal Working Group and the K.V. Kamath Committee findings post-2018 financial sector stress.
- Internationally, this mirrors the Financial Stability Board's (FSB) approach to "systemically important financial institutions" (SIFIs).
Connection to this news: Replacing the subjective parametric scoring with a clean ₹1 lakh crore asset threshold removes regulatory ambiguity and allows entities — including PSUs — to self-assess their regulatory tier, improving compliance efficiency.
Power Finance Corporation (PFC) and REC Limited — PSU NBFCs in Focus
Power Finance Corporation (PFC) and REC Limited are two of India's largest PSU NBFCs, operating under the Ministry of Power. Both provide long-term financing to the power sector — generation, transmission, and distribution utilities.
- PFC's total assets as of FY25: approximately ₹9–10 lakh crore (well above the proposed ₹1 lakh crore threshold).
- REC Limited's total assets: approximately ₹5–6 lakh crore.
- Both are listed on NSE and BSE; PFC holds a majority stake in REC.
- Both were previously classified under the Middle Layer of the SBR framework, despite their massive balance sheets — an anomaly the proposed amendment seeks to correct.
- Being in the Upper Layer would subject them to stricter capital and governance requirements, potentially affecting their borrowing costs and capital structure.
Connection to this news: Inclusion of PFC and REC in the NBFC-UL will bring their regulation closer to that of large banks — increasing systemic resilience but also raising their compliance burden and potentially tightening their lending capacity to the power sector.
Parametric Scoring vs. Rule-Based Regulation — Transparency in Financial Regulation
Regulatory frameworks can be principle-based (requiring judgement), rule-based (clear thresholds), or hybrid. The shift from a parametric scoring system to an asset-size threshold for NBFC-UL classification represents a move toward rule-based regulation.
- The existing parametric scoring methodology included factors like size, interconnectedness, complexity, and systemic importance — requiring RBI judgement and creating uncertainty for NBFCs about their tier.
- A single asset-size threshold is transparent, predictable, and eliminates regulatory arbitrage through threshold manipulation (e.g., structuring asset transfers to stay below the scoring threshold).
- Rule-based regulation reduces compliance costs and regulatory uncertainty — a principle endorsed in the RBI's own ease-of-doing-business initiatives and the Economic Survey recommendations.
Connection to this news: The shift signals RBI's commitment to simpler, more objective regulation — aligning with the "Robust Regulations" and "Competitive Markets" pillars of the newly released Utkarsh 2029 framework.
Credit Risk Transfer — State Government Guarantees as an Instrument
Credit risk transfer (CRT) instruments allow lenders to redistribute the risk of default from their books. State government guarantees are guarantees issued by a state government to cover a borrower's obligations, effectively reducing the lender's credit risk and the capital it must hold against that exposure.
- Under Basel III norms (adopted by RBI), credit risk mitigation techniques (CRMTs) such as guarantees can reduce risk-weighted assets (RWAs), lowering capital requirements.
- State government guarantees are considered high-quality collateral — typically treated as "eligible guarantees" that can reduce provisioning and capital charges.
- However, excessive state guarantee exposure creates contingent fiscal liabilities — a risk flagged by the CAG and the 15th Finance Commission.
Connection to this news: Removing the cap on NBFC-ULs using State Government guarantees could boost infrastructure financing by PSU NBFCs like PFC and REC (which finance state electricity boards) — but increases the state governments' contingent liability exposure.
Key Facts & Data
- Proposed NBFC-UL asset threshold: ₹1,00,000 crore (₹1 lakh crore).
- Existing methodology: "Top 10 by asset size + parametric scoring" — to be replaced by single objective threshold.
- NBFC-UL subject to: higher capital adequacy, leverage limits, mandatory listing, enhanced governance.
- PFC total assets (FY25): ~₹9–10 lakh crore; REC Limited: ~₹5–6 lakh crore (both well above threshold).
- SBR framework effective: October 2022.
- Draft comment deadline: May 4, 2026.
- State government guarantees as CRT: allowed without limit for NBFC-ULs (proposed), subject to conditions.