Redefining upper-layer NBFCs

A key implication of RBI’s revised framework is the removal of ownership-linked regulatory distinctions, which had created a divergence in how different segments were treated

- PRATIK SHAH

THE RBI HAS proposed a fundamental redesign of the upper-layer classification under the non-banking financial company (NBFC)scale-based regulation framework, signalling a decisive shift in how the sector is identified and supervised.

The draft norms move away from the earlier hybrid identification approach—under which upper-layer classification combined the top 10 NBFCs by asset size with a parametric scoring framework—and adopt a largely size-based methodology anchored to a ₹1 lakh-crore asset threshold.

The revised framework dispenses with the scoring construct, while retaining supervisory discretion to designate entities as upper layer where warranted. Besides, it provides for annual re-identification of upper-layer NBFCs, introduces periodic recalibration of the asset size threshold every five years, and moves to a more rules-based approach, allowing greater mobility over time.

The key shift lies in the elimination of the dual identification framework that combined asset size ranking with a relatively complex scoring methodology. It relied on a weighted mix of quantitative (70%) and qualitative (30%) criteria, spanning metrics such as size, leverage, interconnectedness, complexity, and supervisory judgement. While the approach aimed to capture multidimensional systemic risks, it often led to limited transparency around classification triggers—particularly for institutions operating close to the upper layer threshold. The proposed framework replaces this with a clearer, rules-based construct anchored mainly in asset size, improving predictability while retaining periodic supervisory review.