RBI says no to special exposure relaxations for state NBFCs

The Reserve Bank of India declined requests from state government-owned Non-Banking Financial Companies (NBFCs) for special exposure relaxations, withdrawing...

What Happened

The Reserve Bank of India declined requests from state government-owned Non-Banking Financial Companies (NBFCs) for special exposure relaxations, withdrawing the concentration-risk exemptions that had previously been available to them.
State-owned NBFCs are now brought under the same exposure (concentration-risk) framework applicable to their respective regulatory layers under the Scale-Based Regulation (SBR) system, rather than receiving exemptions based on government ownership.
Exposures backed by state government guarantees will, however, be treated as exposures to the guaranteeing state government itself and will be exempt from prudential exposure limits, subject to a 20% risk weight.
The RBI simultaneously revised the large-exposure framework limit for NBFC-Infrastructure Finance Companies (IFCs) in the Upper Layer, raising it from 35% to 45% of Tier 1 capital.
The Upper Layer classification threshold was changed from a parametric scoring system to a simpler asset-size criterion: NBFCs with assets of ₹1 lakh crore (₹1 trillion) and above will automatically be classified as Upper Layer entities; this threshold will be reviewed every three years.

Static Topic Bridges

NBFC Scale-Based Regulation (SBR) Framework

The Reserve Bank of India introduced the Scale-Based Regulation (SBR) framework for NBFCs through a notification dated October 22, 2021, with the framework becoming effective from October 1, 2022. The SBR framework replaced the earlier asset-size-only classification and introduced a four-tier pyramid based on size, activity, and systemic importance, enabling proportionate — rather than uniform — regulation. The four layers are: Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL).

Base Layer (NBFC-BL): Non-deposit-taking NBFCs with assets below ₹1,000 crore and NBFCs with no public funds and no customer interface. Lightest regulation.
Middle Layer (NBFC-ML): All deposit-taking NBFCs regardless of size, and non-deposit-taking NBFCs with assets ₹1,000 crore and above.
Upper Layer (NBFC-UL): NBFCs identified by the RBI as warranting enhanced scrutiny; the top 10 NBFCs by asset size are always included. From June 2026, the threshold is ₹1 lakh crore and above. Upper Layer NBFCs must list on a stock exchange within three years of classification.
Top Layer (NBFC-TL): Ideally remains empty; activated when the RBI determines an Upper Layer NBFC poses substantial systemic risk.
RBI Act authority: RBI regulates NBFCs under Chapters III-B, III-C, and V of the Reserve Bank of India Act, 1934.

Connection to this news: The RBI's refusal to grant special relaxations to state-owned NBFCs enforces the SBR principle that regulatory standards must track systemic risk by size and activity, not by ownership structure.

Concentration Risk and Exposure Norms for NBFCs

Concentration risk refers to the risk arising when a lender's portfolio is excessively exposed to a single borrower, sector, or counterparty, such that a default by that entity causes disproportionate loss. The RBI's prudential exposure norms limit the share of a lender's capital funds that may be lent to a single borrower or group. For NBFCs, these norms are calibrated by regulatory layer under SBR: lighter for Base Layer, bank-equivalent for Upper Layer.

Exposure to a single borrower / counterparty is generally capped as a percentage of Tier 1 capital (the exact percentage varies by layer and activity type under SBR).
Prior to this decision, government-owned NBFCs enjoyed exemptions from concentration-risk limits on the reasoning that government backing reduced default probability.
The RBI has withdrawn these blanket exemptions, treating government ownership as a factor that reduces risk weight (20% risk weight for state-government-guaranteed exposures) but not as grounds for bypassing exposure limits entirely.
NBFC-IFCs in the Upper Layer: large-exposure framework limit revised upward from 35% to 45% of Tier 1 capital — recognising the capital-intensive, long-gestation nature of infrastructure lending.

Connection to this news: The RBI's refusal to grant special exposure relaxations to state NBFCs marks a structural tightening: state ownership no longer overrides the SBR concentration-risk architecture, though state guarantees still carry a concessional 20% risk weight.

Systemic Importance and "Too Big to Fail" Regulation

The SBR framework is designed to prevent the accumulation of unchecked systemic risk in the NBFC sector — a lesson drawn from the IL&FS crisis (2018) and DHFL default (2019), which demonstrated how large NBFCs with complex inter-linkages could transmit stress to banks and the broader financial system. Domestically Systemically Important NBFCs (D-SIBs equivalent for NBFCs) face enhanced capital, governance, and disclosure requirements. The Upper Layer designation under SBR operationalises this concept for NBFCs.

IL&FS group default (September 2018) — approximately ₹91,000 crore in debt — triggered a liquidity crisis across NBFCs and mutual funds.
DHFL (Dewan Housing Finance Corporation Ltd) default (2019) — one of India's largest NBFC collapses — led to the RBI acquiring resolution powers under the Insolvency and Bankruptcy Code (IBC) for financial service providers.
The SBR framework requires Upper Layer NBFCs to maintain a Common Equity Tier 1 (CET1) ratio of at least 9% (vs. 7% for banks) and to publish a board-approved leverage framework.
Listed NBFC requirement: Upper Layer entities must list within 3 years of classification, enhancing transparency and market discipline.
State-owned NBFCs — such as state infrastructure development corporations and state finance corporations — often lend to state government projects and have historically been exempted from exposure norms on the implicit guarantee assumption.

Connection to this news: The removal of blanket exemptions for state NBFCs reflects the RBI's post-IL&FS approach of treating systemic risk as the primary regulatory criterion, irrespective of ownership — preventing state-sector leverage from accumulating outside prudential guardrails.

NBFCs Under the RBI Act, 1934

NBFCs are registered and regulated under the Reserve Bank of India Act, 1934, specifically Chapters III-B (deposit-taking NBFCs), III-C (non-deposit companies), and V (miscellaneous). Every NBFC must register with the RBI and maintain a minimum Net Owned Fund (NOF). The RBI Act empowers the RBI to prescribe prudential norms, issue directions, cancel certificates of registration, and supersede boards of defaulting NBFCs. Unlike banks, NBFCs are not covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme and cannot accept demand deposits.

Minimum Net Owned Fund for NBFC registration: ₹10 crore (revised from ₹2 crore in 2021 as part of SBR).
NBFCs cannot accept savings/current deposits (demand deposits); they may accept Fixed Deposits only if they are deposit-taking NBFCs (NBFC-D) registered for this purpose.
DICGC cover does not apply to NBFC deposits (applies only to commercial and cooperative bank deposits up to ₹5 lakh per depositor per bank).
Key NBFC categories under SBR include: NBFC-Investment and Credit Company (NBFC-ICC), NBFC-Microfinance Institution (NBFC-MFI), NBFC-Infrastructure Finance Company (NBFC-IFC), NBFC-Infrastructure Debt Fund (NBFC-IDF), NBFC-Factor, NBFC-Peer-to-Peer Lending Platform (NBFC-P2P), NBFC-Account Aggregator (NBFC-AA), and Housing Finance Companies (HFCs, regulated under NHB but with RBI oversight post-2019).

Connection to this news: The RBI's uniform application of exposure norms to state NBFCs is an exercise of its statutory prudential authority under the RBI Act, reinforcing that regulatory equality across ownership types is the governing principle.

Key Facts & Data

SBR framework announced: October 22, 2021; effective from October 1, 2022.
Four SBR layers: Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), Top Layer (NBFC-TL).
Upper Layer threshold (revised June 2026): asset size ₹1 lakh crore (₹1 trillion) and above; reviewed every three years.
State-government-guaranteed exposures: treated as exposure to the state government; exempt from concentration limits; 20% risk weight applies.
NBFC-IFC large-exposure limit (Upper Layer): revised from 35% to 45% of Tier 1 capital.
Minimum Net Owned Fund for NBFC registration: ₹10 crore.
Upper Layer NBFCs: must list on stock exchange within 3 years of classification.
CET1 requirement for Upper Layer NBFCs: minimum 9%.
Regulatory authority: Chapters III-B, III-C, V of the RBI Act, 1934.
DICGC deposit insurance does not cover NBFC deposits (only bank deposits up to ₹5 lakh per depositor per institution).
IL&FS default (2018): approximately ₹91,000 crore; pivotal trigger for SBR framework design.