On 24 June 2026, the Reserve Bank of India (RBI) overhauled the legal frameworks for non-banking financial companies (NBFCs). These changes simplify the way ‘upper layer’ NBFCs are identified and also tighten the regulatory framework of government-owned NBFCs.
The most important change is the introduction of a clear test for identifying upper layer NBFCs. Earlier, RBI followed a score-based approach that involved a degree of regulatory assessment and subjectivity. However, under the new framework, NBFCs with a minimum asset size of ₹1 trillion as per its latest annual audited balance sheet will be classified in the upper layer. This replaces the earlier subjectivity-based regime with a more transparent and threshold-based test.
Interestingly, market participants had suggested to the central bank that the threshold be increased to ₹2.5 trillion. RBI, however retained the ₹1 trillion threshold, noting that it is based on the current profile of the NBFC sector and the analysis of financial profiles of the existing upper layer NBFCs. It also clarified that this threshold would be reviewed every three years, instead of the earlier five-year timeline. This is a forward-looking approach, as it gives RBI the flexibility to recalibrate the framework every three years, depending upon the demand, growth and projections in the overall business of NBFCs.
Another major amendment made is the inclusion of government-owned NBFCs in the upper layer. Earlier, these government-owned entities were placed only in the base layer or the middle layer. With this amendment, the regulatory framework for privately-owned NBFCs and government-owned NBCFs has been harmonized, which is consistent with RBI’s broader move towards ownership-neutral regulation. That said, it has provided a limited exception to upper layer NBFCs that are fully owned and controlled by the government. Such entities are not required to follow listing requirements and certain disclosure norms, which are otherwise applicable to the upper layer NBFCs.
The amendments also tighten exposure framework for government-owned NBFCs. These entities are now subject to exposure limits applicable to their respective regulatory layer. Existing deviations may continue until the maturity of loans already sanctioned; however, further exposure to such borrowers will be restricted. Having said this, government-owned NBFCs in the middle and/or upper layer have been permitted take exposure beyond permissible limits where such exposure is fully covered by eligible credit-risk-transfer instruments, resulting in net zero incremental exposure.
These amendments also bring in a welcome change for NBFC–IFCs (infrastructure finance companies). Considering the financial needs of India's infrastructure sector, the group exposure limits for upper layer NBFC–IFCs have been increased to 45%. This is expected to provide additional lending headroom for infrastructure financing and support ongoing infrastructure projects.
Overall, the amendments send a clear regulatory message. Large NBFCs must monitor their asset size more closely, while government-owned NBFCs must prepare themselves for an enhanced regulatory regime. RBI has also indicated that as the NBFC sector grows in size and scale, its regulatory oversight over NBFCs generally will also grow.
In essence, scale will increasingly attract enhanced regulatory oversight, and large NBFCs, whether privately held or government-owned, will be expected to meet higher standards of governance, disclosure, capital discipline and concentration-risk management.
Nand Gopal Anand and Harshit Dusad, partners at JSA Advocates & Solicitors. Views expressed are their personal.