Under draft amendments to the Scale-Based Regulatory (SBR) framework, NBFCs with assets of ₹1 lakh crore and above will be categorised as upper-layer entities, replacing the current model that combines quantitative and qualitative parameters.
Simplification without immediate disruption
Sanjay Doshi, Partner and Head at KPMG India, said the proposed framework is unlikely to materially alter the operating landscape in the short- to mid-term.
Doshi said existing capital adequacy and exposure norms already factor in systemic risks.
He said regulatory treatment of government-backed exposures remains broadly unchanged, limiting any immediate balance sheet impact for large NBFCs.
Tighter norms as firms move up the regulatory ladder
The more meaningful impact will be seen when entities transition into the upper layer, according to A M Karthik, Senior Vice President at ICRA.
“When an entity moves from middle layer to upper layer, group-level tightening is likely,” Karthik said.
He pointed out that exposure norms become more stringent at the upper layer:
- Group exposure limits reduce to around 30% of Tier-1 capital, from about 50% earlier
- Single borrower limits are also tightened
However, Karthik noted that most NBFCs are currently operating within these thresholds, and therefore, the transition is unlikely to create immediate stress.
Government NBFCs: Inclusion with calibrated relief
A key change in the draft is the inclusion of government-owned NBFCs in the upper layer, aligning with the RBI’s ownership-neutral approach.
Karthik said such entities are likely to qualify for upper-layer classification based on size, but highlighted that exemptions on concentration norms—particularly for government-backed exposures—have been extended.
Doshi added that while exposures backed by central or state government guarantees may be excluded from certain concentration limits, capital requirements for such exposures continue to apply, maintaining a degree of prudential discipline.
Limited scope to avoid stricter classification
On whether NBFCs may attempt to stay below the ₹1 lakh crore threshold, Doshi said balance sheet manoeuvring options are constrained.
“Their ability to manage balance sheet size to avoid classification will not work in the mid to long term,” he said.
He noted that off-balance-sheet strategies and structural changes, such as splitting entities, face regulatory and practical limitations, making it more likely that firms will prepare for eventual upper-layer classification.
Implications for large groups and CICs
The draft also brings into focus large Core Investment Companies (CICs), particularly those crossing the asset threshold.
Doshi said such entities may need to evaluate whether they should continue as NBFCs, especially if they do not raise public funds or pose systemic risk, indicating a potential shift in how large conglomerate structures are regulated.
Transition to be gradual
Karthik noted that classification changes will not be abrupt:
- Entities identified as upper-layer NBFCs will typically remain in that category for a defined period (up to five years)
- The RBI also engages with firms that are approaching the threshold, allowing advance preparation for tighter norms
He added that there are currently no significant unlisted entities likely to enter the upper layer immediately under the proposed framework.
The broader regulatory direction
While the move simplifies classification by relying solely on asset size, it signals a continued push by the RBI to tighten oversight of systemically important NBFCs.
In the near term, the impact may be muted. But over time, the framework is expected to:
- Strengthen risk controls through tighter exposure norms
- Reduce regulatory arbitrage
- Move large NBFCs closer to bank-like regulatory standards
