RBI Draft Norms To Expand NBFC Upper Layer, Increase Regulatory Coverage: CareEdge Ratings

The proposed changes in SBR framework introduces a single threshold of Rs 1 lakh crore in total assets for classifying NBFCs into the Upper Layer, replacing the current two-pronged methodology based on size and parametric scoring. Inclusion of Government-Owned NBFCs A key change is the adoption of an ownership-neutral approach, bringing government-owned NBFCs under the Upper Layer framework. Earlier, such entities were largely placed in lower regulatory layers despite their size. If implemented, the number of Upper Layer NBFCs could rise from 15 to around 19, significantly increasing regulatory coverage. Sharp Increase in Asset Coverage In a report released on Wednesday, CareEdge Ratings said that if the central bank's draft amendments are finalised without any changes it will lead to substantial widening of regulatory oversight over systemically important NBFCs. Stricter Compliance for Newly Classified Entities NBFCs moving into the Upper Layer will be subject to tighter regulatory norms, including a minimum Common Equity Tier-I (CET-I) capital requirement of 9 per cent, mandatory listing on stock exchanges within three years, enhanced disclosure and governance standards, and applicability of the Large Exposure Framework (LEF), which reduces exposure limits. However, many of the likely entrants are already listed and maintain relatively strong balance sheets, which may help ease the transition. Limited Impact on Government NBFCs The draft retains a provision allowing exposures backed by state government guarantees to attract a lower risk weight of 20 per cent, with exposure shifting to the state government without caps. As a result, the impact on government-owned NBFCs is expected to be limited. Regulatory Clarity Still Needed CareEdge noted that certain aspects require further clarity, including whether off-balance-sheet exposures and securitised assets will be included in the asset threshold, and whether classification will be based on standalone or consolidated financials. Sanjay Agarwal, Senior Director, CareEdge, said, “The proposed changes are also expected to materially expand the asset coverage under the Upper Layer, thereby strengthening systemic oversight and enhancing regulatory clarity for market participants.” “However, certain aspects of the framework warrant further regulatory clarity. In particular, it remains unclear whether the asset size threshold for Upper Layer classification will include off-balance-sheet exposures PTCs and whether it will be measured on a standalone or consolidated basis,” Agarwal added. Aditya Acharekar, Associate Director, CareEdge, said that most NBFCs likely to enter the revised Upper Layer are already compliant with minimum capital norms and are listed. However, the framework will require stronger governance and disclosures, tighter caps on group and single-counterparty exposures, and enhanced risk management and compliance. A carve-out allows sector-specific government NBFCs to approach the RBI for exemptions from asset exposure norms, he noted. Acharekar added, “While these measures may lead to incremental compliance costs, they are expected to strengthen balance sheet resilience, improve transparency, and enhance overall financial stability within the NBFC sector over the medium term.” (KNN Bureau)