The Reserve Bank of India (RBI) has issued draft proposals to revamp the framework used for identifying Upper Layer (UL) Non-Banking Financial Companies (NBFCs), aiming to simplify classification and strengthen regulatory oversight.
Shift to Asset-Based Classification
One of the key changes proposed is the replacement of the existing scoring-based system with a more straightforward asset-size criterion. Under the new framework, NBFCs with total assets of ₹1 lakh crore or more would automatically qualify as Upper Layer entities.
This move is expected to make the classification process more transparent and easier to implement.
End of Automatic Top 10 Inclusion
The RBI has also proposed removing the current rule that automatically places the top 10 NBFCs into the Upper Layer category. This marks a shift away from relative ranking toward objective thresholds.
In addition, the draft suggests easing earlier restrictions on government-owned NBFCs, allowing them to be considered for UL classification. It also proposes excluding certain state government-guaranteed exposures—without predefined caps—when evaluating eligibility for elevation to the upper layer.
Periodic Review and Terminology Changes
To ensure the framework remains relevant over time, the RBI has recommended reviewing the asset threshold every five years.
The regulator has also proposed replacing the term “parametric criteria” with “prescribed criteria” to improve clarity and consistency in regulatory language.
Tighter Regulations for Upper Layer NBFCs
NBFCs classified under the Upper Layer will continue to face stricter regulatory norms. The proposed changes include tighter credit exposure limits:
- Maximum exposure to a single borrower: reduced to 20%
- Maximum exposure to a borrower group: reduced to 25%
These are lower than the earlier limits of 25% and 40%, respectively.
UL NBFCs will also be subject to enhanced requirements related to capital adequacy, corporate governance, and disclosures, reinforcing the RBI’s focus on financial stability.
Conclusion
The proposed revisions signal RBI’s intent to streamline the classification of large NBFCs while strengthening oversight. By introducing clearer criteria and tighter norms, the regulator aims to enhance risk management and ensure greater resilience within the non-banking financial sector.
Summary:
RBI has proposed a simplified asset-based framework to identify Upper Layer NBFCs, replacing the existing scoring model. The changes include removing automatic top 10 classification, easing rules for government-owned NBFCs, and introducing stricter exposure norms, aiming to improve transparency and regulatory oversight.
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