RBI Proposes Major Changes to UL NBFC Identification Framework

The Reserve Bank of India (RBI) has released draft amendments to revise the framework for identifying Upper Layer (UL) Non-Banking Financial Companies (NBFCs), along with changes related to the classification of government-owned NBFCs.

A key proposal is the replacement of the existing parametric scoring model with a simpler asset-size based approach. Under the revised framework, NBFCs with total assets of ₹1 lakh crore and above would be classified as UL NBFCs.

Removal of Automatic Top 10 Classification

The RBI has proposed doing away with the current practice of automatically placing the top 10 NBFCs in the upper layer, marking a shift away from ranking-based identification.

The draft also suggests removing restrictions that previously prevented state-owned NBFCs from being considered for UL classification. Additionally, it proposes allowing the exclusion of uncapped state government-guaranteed exposures while assessing eligibility for transition into the upper layer.

Periodic Review and Terminology Update

To keep the framework relevant, the RBI has proposed a periodic review of the UL classification criteria, with the asset threshold to be reassessed every five years. It has also replaced the term “parametric criteria” with “prescribed criteria” for clearer regulatory language.

Stricter Norms for UL NBFCs

NBFCs classified under the upper layer will face tighter regulatory requirements. Credit concentration limits would be reduced to 20% for a single borrower and 25% for a borrower group, compared to the earlier limits of 25% and 40% respectively.

Overall, UL NBFCs will be subject to stronger regulatory oversight, including higher standards for capital adequacy, governance, and disclosure requirements.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation or investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks. Read all related documents carefully before investing.