The Reserve Bank of India (RBI) classifies Non-Banking Financial Companies (NBFCs) under a four-layered regulatory framework — Base Layer, Middle Layer, Upper Layer, and Top Layer — depending on their size, risk profile, and systemic importance.
For instance, large NBFCs such as Bajaj Finance, Tata Capital, Mahindra Finance, and Shriram Finance are placed in the Upper Layer due to their significant size, market presence, and interconnected operations within the financial ecosystem.
The classification of NBFCs is determined not only by asset size but also by multiple parameters that reflect systemic risk and operational complexity. These include:
• Total Exposure: Both on-balance and off-balance sheet exposures.
• Interconnectedness: Links with banks, mutual funds, and other financial institutions.
• Complexity of Activities: Extent of financial innovation, derivatives exposure, and cross-sector operations.
• Nature of Liability Structure: Level of public funds, deposits, and borrowings.
• Regulatory and Supervisory Inputs: RBI’s judgment based on systemic risk potential and oversight requirements.
Accordingly, major players such as Bajaj Finance, Tata Capital, Mahindra Finance, and Shriram Finance have been categorised under the Upper Layer due to their scale and interconnected activities.
The Top Layer of the NBFC regulatory pyramid is reserved for exceptional cases where the RBI identifies an extreme increase in systemic risk posed by specific entities. It acts as a prudential buffer for potential crises or excessive concentration of risk within the sector.
At present, no NBFCs have been placed in this layer, as none exhibit risks beyond those already monitored in the upper layer. However, if an NBFC’s risk profile begins to resemble that of a “too-big-to-fail” institution, the RBI may classify it in this top tier for closer supervision.
The layered regulatory structure serves multiple objectives:
• To align regulatory intensity with risk levels—ensuring stricter oversight for larger and systemically important NBFCs.
• To prevent IL&FS-type crises by enforcing tighter norms for entities with significant public exposure.
• To enhance transparency and stability in India’s shadow banking system.
• To protect investors and depositors by improving disclosure and accountability standards.
The RBI is expected to expand the Upper Layer category to include more NBFCs, especially those with:
• Large loan books exceeding ₹5 trillion.
• Public-sector NBFCs and housing finance subsidiaries of industrial conglomerates.
• Entities with significant market exposure and off-balance-sheet commitments.
Under the framework, all NBFCs classified in the Upper Layer are required to list on stock exchanges within three years of such classification. This move aims to improve public accountability, market discipline, and disclosure standards.
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