Decrypting Layered Classification and Regulation for NBFC by Reserve Bank of India pertinent to Risk Associated therewith and perceiving Base Layer

Ankita Sharma
Ankita Sharma

Published on: Aug 16, 2022

Aakanksha Singhal
Aakanksha Singhal

Updated on: Jul 13, 2024

(30 Ratings)

Reserve Bank of India has introduced Scale Based Regulation for Non-Banking Financial Companies on October 22, 2021. The Apex Bank is aiming to restructure the regulatory set for Non-Banking Financial Companies by keeping certain provisions static, revising specific requirements, and introducing new mandates. Banks and Non-Banking Financial Companies in Upper Layer will be brought on the same footing up to some extent.

In this Article the key highlights of the regulation are reflected along with the governance structure specifically for Base Layer NBFC is discussed. The NBFCs in Middle Layer and Upper Layer are subject to more detailed regulations which will be addressed separately along with circulars and guidelines further issued by RBI.

In order to impart better and comparative understanding of laws prevailed earlier and new law, please refer to Article on “NON-BANKING FINANCIAL COMPANY (NBFC) – INDIA

The Scale Based Regulation Framework for Non-Banking Financial Companies is effective from October 01, 2022.

Key Highlights:

  1. Re-Classification of Non-Banking Financial Companies – Sustaining the various categories of NBFC such as NBFC- Infrastructure Investment Company, Core Investment Company, Microfinance Institution, Systemically Important/ Non-Systemically Important, Deposit taking/Non-deposit taking etc the re-classification of NBFCs in to three levels is done to make certain provisions universal.
    • Layer Based Classification into four layers – Base Layer, Middle Layer, Upper Layer, and Top Layer
    • Classification in terms of Asset Size, Perceived Riskiness Involved
    • Various Activities Undertaken by NBFCs are considered for classification
  2. Enhanced Governance – To address the need of time, RBI has amended and uniformed governance structure that will apply layer wise.
    • The governance over different layer will vary and depends on the meeting of thresholds by NBFCs
    • Additional Disclosure Requirements for Upper and Middle Layer NBFCs are prescribed
    • Constitution of Internal Committees and Assessments
  3. Internal Capital Adequacy Assessment Process – NBFCs’ are required to assess their capital in proportion to risk to the business in same way as done by Commercial Banks under Master Circular – Basel III Capital Regulations prescribes.
    • Similar to Commercial Banks
    • Adequate Capital to support all risks in the business of NBFC
    • Develop and use better Internal Risk Management Techniques
  4. Core Financial Service Solution
    • Akin to Core Banking Solution adopted by Banks
    • The Solution is required to be adopted by NBFC Middle Layer and Upper Layer with 10 or more Fixed Point Service Delivery Unit
    • Implementation of the Solution has to be quarterly reported to RBI
    • For Seamless customer interface in digital offerings and transactions.

Classification of NBFCs in Layers:

The demarcation of the regulatory structure for NBFCs in the different layers shall be based on certain fundamental triggers such as Comprehensive Risk Perception, Size of Operations, and Activities of NBFCs. All existing types of NBFCs will be defined in terms of following layers:

  1. Base Layer
    • Non-deposit-taking NBFCs below the asset size of ₹1000 crore
    • NBFCs undertaking the following activities will always remain in the Base Layer of the Regulatory Structure:
      • NBFC-Peer to Peer Lending Platform (NBFC-P2P)
      • NBFC-Account Aggregator (NBFC-AA)
      • Non-Operative Financial Holding Company (NOFHC)
      • NBFCs that are not availing public funds and do not have any customer interface
  2. Middle Layer
    • All deposit-taking NBFCs (NBFC-Ds), irrespective of the asset size
    • Non-deposit taking NBFCs with asset size of ₹1000 crore and above
    • NBFCs undertaking the following activities:
      • Standalone Primary Dealers (SPDs)
      • Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs)
      • Core Investment Companies (CICs)
      • Housing Finance Companies (HFCs)
      • Infrastructure Finance Companies (NBFC-IFCs)
    • Deposit-taking NBFCs (NBFC-Ds), Core Investment Companies (CICs), Infrastructure Finance Companies (NBFC-IFCs) and, Housing Finance Companies (HFCs) will be included in Middle Layer or the Upper Layer and not in the Base layer, as the case may be.
    • Standalone Primary Dealers (SPDs) and Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs) will always remain in the Middle Layer.
  3. Upper Layer
    Identification of NBFCs in the Upper Layer shall be on the basis of a set of Parameters and Scoring Methodology having a weightage of 70% and 30% respectively, as is indicated in the Appendix of the Framework and which will be evaluated based on their annual performance as of March 31 each year. However, the top 10 eligible NBFCs in terms of asset size will reside in this category irrespective of any other factor.
  4. Top Layer
    NBFC Upper Layer will be moved to Top Layer if the Reserve Bank of India recognizes a substantial increase in the potential systemic risk from specific NBFC in the Upper Layer. As of now, the Top Layer shall ideally remain empty.
    Note: The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factors, and Mortgage Guarantee Companies (NBFC-MGC) could be placed in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework. Government-owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case may be.

Changed Regulation for NBFC Base Layer:

NBFCs in the Base Layer (NBFC-BL) shall be subject to the regulations as are currently applicable to Non-Deposit taking Non-Banking Financial Companies – Non- Deposit Taking Companies (NBFC-ND) except the following provisions:

  1. Minimum Net Owned Fund Requirements:
    • NBFC-Peer to Peer Lending Platform (NBFC-P2P), NBFC-Account Aggregator (NBFC-AA), and NBFCs with no public funds and no customer interface shall continue to adhere to the Net Owned Fund (NOF) requirements of ₹2 crores.
    • Also, no change has been proposed in the existing regulatory minimum Net Owned Fund (NOF) requirements for Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs), Infrastructure Finance Companies (NBFC-IFCs), Mortgage Guarantee Companies (MGCs), Housing Finance Companies (HFCs), and Standalone Primary Dealers (SPDs).
    • Regulatory minimum Net Owned Fund (NOF) requirements for NBFC – Investment and Credit Company (NBFC-ICC), NBFC – Micro Finance Institutions (NBFC-MFI), and, NBFC-Factors shall be increased to ₹10 crores.
    • The glide path to achieve the revised Net Owned Fund (NOF) requirements for the existing NBFCs is provided in the table below:
NBFCs Current NOF By March 31, 2025 By March 31, 2027
NBFC-ICC ₹2 crores ₹5 crores ₹10 crores
NBFC-MFI ₹5 crores (₹2 crore in NE Region) ₹7 crores (₹5 crore in NE Region) ₹10 crores
NBFC-Factors ₹5 crores ₹7 crores ₹10 crores
  1. Non-Performing Asset Classification:
    Modifying the classification norm of the Non-Performing Asset to the overdue period of more than 90 days for all categories of NBFCs. NBFC-BL shall follow the glide path so as to adhere to the NPA classification provided as under:
NPA Norms Timeline
>150 Days overdue By March 31, 2024
>120 Days overdue By March 31, 2025
>90 Days overdue By March 31, 2026
  1. Qualification of Director:
    At least one of the directors shall have relevant experience of having worked in a bank/ NBFC, considering the need for professional expertise in managing the affairs of the NBFCs.
  2. Ceiling on Subscription through IPO:
    Application of the ceiling of ₹1 crore per borrower for financing subscription to Initial Public Offer (IPO). However, NBFCs can fix more conservative limits.
  3. Grant of Loans to Directors and Senior Officers:
    Putting in place a Board Approved Policy for granting loans to the Directors, Senior Officers, and Relatives of Directors and to entities where directors or their relatives have a major shareholding.
  4. Risk Management Committee:
    Constitution of a Risk Management Committee either at the Board or Executive level for evaluating the overall risks faced by the NBFC including liquidity risk and such Committee shall report to the Board.
  5. Disclosure Requirements:
    Base Layer NBFCs are required to make certain additional disclosure in Annual Financial Statements such as Related Party Transactions, Exposure to Real Estate Sector, Exposure to Capital Market, Sectoral Exposure, etc.


To simplify the governance structure for NBFCs, the reserve bank is restructuring the sector and modifying compliance requirements as per the need of the hour. Till the time this Regulation becomes effective many changes can be anticipated. Bank will bring more clarity in terms of implementation of this Regulation as well as about simultaneous application of existing Regulations.


The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.

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