To align the regulatory framework for Non-Banking Financial Companies (NBFCs) keeping in view their changing risk profile, Reserve Bank of India (RBI) has introduced the Scale Based Regulation (SBR) for NBFCs.
From when is Scale Based Regulation (SBR) applicable to NBFCs?
Scale Based Regulation (SBR) for Non-Banking Financial Companies (NBFCs) is effective from October 01, 2022.
What will be regulatory structure for NBFCs under SBR?
The regulatory structure for NBFCs comprises of four layers based on their size, activity, and perceived riskiness.
- NBFC - Base Layer (NBFC-BL)
- NBFC - Middle Layer (NBFC-ML)
- NBFC - Upper Layer (NBFC-UL)
- NBFC - Top Layer (NBFC-TL) – The Top Layer is ideally expected to be empty.
Which NBFCs are included in Base Layer?
The Base Layer comprises of –
- Non-deposit taking NBFCs below the asset size of ₹1000 crore
- NBFCs undertaking the following activities –
- NBFC-Peer to Peer Lending Platform (NBFC-P2P)
- NBFC-Account Aggregator (NBFC-AA)
- Non-Operative Financial Holding Company (NOFHC)
- NBFCs not availing public funds and not having any customer interface
Which NBFCs are included in Middle Layer?
The Middle Layer consists of –
- All deposit taking NBFCs (NBFC-Ds), irrespective of 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 - NBFC (IDF-NBFCs)
- Core Investment Companies (CICs)
- Housing Finance Companies (HFCs)
- Infrastructure Finance Companies (NBFC-IFCs)
Which NBFCs are included in Upper Layer?
Upper Layer comprises of those NBFCs which are specifically identified by RBI as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology.
The top 10 eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.
(Updated on January 16, 2025)
RBI had announced the list of 15 NBFCs in the Upper Layer for the year 2024-25.
Once an NBFC is classified as NBFC-UL, it shall be subject to enhanced regulatory requirement, at least for 5 years from its classification in the layer, even in case it does not meet the parametric criteria in the subsequent years.
The Top Layer will ideally remain empty. This layer can get populated if RBI is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.
How are Government owned NBFCs classified?
As per RBI’s circular on ‘Withdrawal of Exemptions Granted to Government Owned NBFCs’ dated May 31, 2018, the Government owned NBFCs are still in the transition period to attain the minimum CRAR. Therefore, these NBFCs are not subjected to the Upper Layer regulatory framework at this juncture. A decision on including eligible Government NBFCs meeting the specified criteria into the Upper Layer will be taken at a later stage.
| NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface | Always in Base Layer |
| NBFC-D, CIC, IFC and HFC | Middle Layer / Upper Layer (and not in the Base layer) |
| SPD and IDF-NBFC | Always in Middle Layer |
| Investment and Credit Companies (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) | Any of the layers |
| Government owned NBFCs | Base Layer / Middle Layer Not in Upper Layer till further notice |
How much Net Owned Fund (NOF) is required under SBR?
The Net Owned Fund (NOF) needs to be increased by NBFCs of all layers as per the following timelines –
| NBFCs | Current NOF | By March 31, 2025 | By March 31, 2027 |
| NBFC-ICC | ₹2 crore | ₹5 crore | ₹10 crore |
| NBFC-MFI | ₹5 crore (₹2 crore in NE Region) |
₹7 crore (₹5 crore in NE Region) |
₹10 crore |
| NBFC-Factors | ₹5 crore | ₹7 crore | ₹10 crore |
| NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface | ₹2 crore | No change | |
| NBFCs – IDF, NBFCs - IFC | ₹300 crore | ||
| NBFCs - MGCs | ₹100 crore | ||
| NBFCs - HFC | ₹20 crore | ||
| NBFCs - SPD which undertake only the core activities | ₹150 crore | ||
| NBFCs - SPD which also undertake non-core activities | ₹250 crore | ||
What are guidelines on NPA classification?
The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs.
A glide path is provided to NBFCs in Base Layer to adhere to the 90 days NPA norm as under –
| NPA Norms | Timeline |
| >150 days overdue | By March 31, 2024 |
| >120 days overdue | By March 31, 2025 |
| > 90 days | By March 31, 2026 |
| The glide path is not applicable to NBFCs which are already required to follow the 90-day NPA norm. | |
What are guidelines on implementation of Core Financial Services Solution (CFSS)?
NBFC-ML and NBFC-UL with 10 and more ’Fixed point service delivery units’ as on October 01, 2022 are mandatorily required to implement ‘Core Financial Services Solution (CFSS)’, akin to the Core Banking Solution (CBS) adopted by banks.
| Category of NBFC | Timeframe for implementation |
| NBFC-ML and NBFC-UL with 10 or more ‘Fixed point service delivery units’ | On / before September 30, 2025. However, NBFC-UL to ensure that CFSS is implemented at least in 70% of ‘Fixed point service delivery units’ on / before September 30, 2024. |
| NBFC-BL and NBFC-ML and UL with fewer than 10 ’Fixed point service delivery units’ | Not mandatory. However, they may consider implementation of a CFSS for their own benefit. |
A quarterly progress report on the implementation of CFSS to be furnished by NBFC to Senior Supervisory Manager (SSM) Office of RBI starting from quarter ending March 31, 2023.
‘Fixed point service delivery unit’ is a place of operation from where the business activity of non-banking financial intermediation is carried out by NBFC and is manned by its own staff / outsourced agents. It carries uniform signage with name of the NBFC and functions under administrative control of the NBFC. Administrative Offices and Back Offices which do not have any direct interface with customers should not be treated as a ‘Fixed point service delivery unit’.
What are guidelines on appointment and working of Chief Compliance Officer (CCO)?
- NBFC-UL and NBFC-ML shall put in place Board approved policy and Compliance Function, including the appointment of Chief Compliance Officer (CCO), latest by April 01, 2023 and October 01, 2023, respectively.
- There shall not be any 'dual hatting,' i.e., CCO shall not be given any responsibility which brings elements of conflict of interest, especially any role relating to business.
- CCO shall be appointed for a minimum fixed tenure of at least 3 years. However, in exceptional cases, the Board / Board Committee may relax the minimum tenure by 1 year, provided appropriate succession planning is put in place.
- CCO shall be transferred / removed before completion of the tenure only in exceptional circumstances, with the explicit prior approval of the Board / Board Committee.
- CCO shall be a senior executive of NBFC with a position not below two levels from the CEO. However, in the case of NBFCs-ML, this requirement can be relaxed by one level further. If NBFC considers necessary, the CCO can also be recruited from the market.
- A prior intimation to Senior Supervisory Manager (SSM), Department of Supervision, RBI, shall be provided before appointment, premature transfer, resignation, early retirement or removal of CCO.
- CCO shall have direct reporting lines to MD & CEO and / or Board / Board Committee. In case CCO reports to MD & CEO, the Board / Board Committee shall meet the CCO at quarterly intervals on a one-to-one basis, without the presence of the senior management, including MD & CEO. Performance appraisal of CCO shall be reviewed by the Board / Board Committee.
What are guidelines on loans and advances?
Unless sanctioned by the Board of Directors / Committee of Directors, NBFC-ML and NBFC-UL shall not grant loans and advances aggregating ₹5 crores and above to –
- their directors (including Chairman / Managing Director) or relatives of directors.
- any firm in which any of their directors or their relatives is interested as a partner, manager, employee or guarantor.
- any company in which any of their directors, or their relatives is interested as a major shareholder, director, manager, employee or guarantor.
What are guidelines on Capital requirements?
NBFC-UL [except Core Investment Companies (CICs)] shall maintain, on an on-going basis, Common Equity Tier 1 (CET1) ratio of at least 9%.
| Common Equity Tier 1 (CET1) ratio = | Common Equity Tier 1 Capital |
| Total Risk Weighted Assets |
What are guidelines on Large Exposures Framework?
“Large Exposure” (“LE”) means the sum of all exposure values of a NBFC-UL, to a counterparty and / or a group of connected counterparties, if it is equal to or above 10% of the NBFC-UL’s eligible capital base.
Exposure comprises both on and off-balance sheet exposures by NBFC-UL.
These guidelines are applicable to NBFC-UL, both at the solo level and at the consolidated (group) level.
| Large Exposure limits (as % of eligible capital base) | ||
|
|
NBFC-UL (Other than IFC) | NBFC-UL (IFC) |
| Single Counterparty | – Up to 20% – Additional 5% with Board approval – Additional 5% if exposure towards Infrastructure loan / investment (Shall not exceed 25% in any case) |
– Up to 25% – Additional 5% with Board approval (Shall not exceed 30% in any case) |
| Group of connected Counterparties | – Up to 25% – Additional 10% if exposure towards Infrastructure loan / investment |
Up to 35% |
What are guidelines on Compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs?
These guidelines shall come into effect from April 01, 2023 and shall be applicable for fixing the compensation policy of Key Managerial Personnel and members of senior management of all NBFCs under SBR framework, except those categorised under ‘Base Layer’ and Government owned NBFCs.
The deferred compensation may be subject to malus / clawback arrangements in the event of subdued or negative financial performance of the company and / or the relevant line of business or employee misconduct in any year.
- Malus arrangement – A malus arrangement permits the NBFC to prevent vesting of all or part of the amount of a deferred remuneration. Malus arrangement does not reverse vesting after it has already occurred.
- Clawback arrangement – A clawback is a contractual agreement between the employee and the NBFC in which the employee agrees to return previously paid or vested remuneration to the NBFC under certain circumstances.
What are guidelines on provisioning for Standard assets?
With effect from October 01, 2022, NBFC-UL shall maintain provisions in respect of ‘standard’ assets at the following rates –
| Category of Assets | Rate of Provision |
| Individual housing loans and loans to Small and Micro Enterprises (SMEs) | 0.25% |
| Housing loans extended at teaser rates | 2.00%, which will decrease to 0.40% after 1 year from the date on which the rates are reset at higher rates (if the accounts remain ‘standard’) |
| Advances to Commercial Real Estate – Residential Housing (CRE - RH) Sector | 0.75% |
| Advances to Commercial Real Estate (CRE) Sector (other than CRE-RH) | 1.00% |
| Restructured advances | As stipulated in the applicable prudential norms for restructuring of advances |
| All other loans and advances not included above, including loans to Medium Enterprises | 0.40% |
What are guidelines on classification in Middle Layer for Multiple NBFCs in a Group?
The total assets of all the NBFCs in a Group to be consolidated to determine the threshold for their classification in the Middle Layer with effect from October 01, 2022.
If the consolidated asset size of the Group is ₹1000 crore and above, then each Investment and Credit Company (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factor and Mortgage Guarantee Company (NBFC-MGC) lying in the Group shall be classified as an NBFC in the Middle Layer and consequently, regulations as applicable to the Middle Layer shall be applicable to them.
These guidelines are not applicable for classifying an NBFC in the Upper Layer.
References
Reserve Bank of India. (2021, October 22). 'Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12179&Mode=0
Reserve Bank of India. (2022, April 11). 'Compliance Function and Role of Chief Compliance Officer (CCO) - NBFCs'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12290&Mode=0#:~:text=Compliance%20Function%20shall%20ensure%20strict,the%20suitability%20of%20customer%20service.
Reserve Bank of India. (2022, April 29). 'Guidelines on Compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12303&Mode=0
Reserve Bank of India. (2022, February 23). 'Implementation of ‘Core Financial Services Solution’ by Non-Banking Financial Companies (NBFCs)'. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12247&Mode=0#:~:text=Accordingly%2C%20it%20has%20been%20decided,(CBS)%20adopted%20by%20banks.
Reserve Bank of India. (2022, April 19). 'Large Exposures Framework for Non-Banking Financial Company - Upper Layer (NBFC-UL)'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12298&Mode=0
Reserve Bank of India. (2022, April 19). 'Loans and Advances – Regulatory Restrictions - NBFCs'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12294&Mode=0
Reserve Bank of India. (2022, October 11). 'Multiple NBFCs in a Group: Classification in Middle Layer'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12400&Mode=0
Reserve Bank of India. (2022, June 06). 'Provisioning for Standard assets by Non-Banking Financial Company – Upper Layer'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12329&Mode=0
Reserve Bank of India. (2022, April 19). 'Scale Based Regulation (SBR) for NBFCs: Capital requirements for Non-Banking Finance Companies – Upper Layer (NBFC-UL)'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12296&Mode=0
Reserve Bank of India. (2025, January 16). 'RBI releases list of NBFCs in the Upper Layer (NBFC-UL) under Scale Based Regulation for NBFCs'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59537
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