In September 2018, IL&FS — Infrastructure Leasing & Financial Services — defaulted on its commercial paper obligations. Within weeks, the contagion spread through the mutual fund industry, froze the commercial paper market, and triggered a liquidity crisis that took down DHFL and nearly brought several housing finance companies to their knees. IL&FS was classified as a "systemically important" Core Investment Company under the RBI's regulatory framework. It had the label. It had the reporting requirements. And none of it had prevented a Rs 91,000 crore collapse, because the entire classification system was built on the wrong axis.
The RBI had been regulating NBFCs by what they did — lending, investing, infrastructure finance, microfinance, factoring. An NBFC with Rs 50,000 crore in assets faced broadly similar prudential norms as one with Rs 500 crore, so long as both sat in the same activity category. The reason this failed was straightforward: systemic risk is a function of size and interconnectedness, not activity type. A massive infrastructure lender funding itself through commercial paper held by mutual funds posed the same contagion risk as a bank — but faced lighter capital requirements, looser governance standards, and less intrusive supervision.
Three years later, the RBI replaced the entire classification system.
Why did the old framework break?
The original "systemically important" classification dates to December 2006, when the RBI issued two companion circulars that defined the concept for the first time. Financial Regulation of Systemically Important NBFCs and Banks' Relationship with them RBI/2006-07/205 (since withdrawn) — with 22 downstream references — and its companion direction for NBFCs RBI/2006-07/204 established a binary distinction: an NBFC was either systemically important (asset size above Rs 100 crore) or it was not.
"The application of the prudential guidelines / limits, is thus not uniform across the banking and NBFC sectors and within the NBFC sector. There are distinct differences in the application of the prudential guidelines / norms." — RBI/2006-07/205, December 2006 (since withdrawn)
The RBI recognised the non-uniformity in 2006 but addressed it with a binary switch rather than a gradient. In August 2008, Guidelines for NBFC-ND-SI on capital adequacy, liquidity and disclosure RBI/2008-09/116 — 35 downstream references — imposed capital adequacy and liquidity norms on systemically important non-deposit-taking NBFCs. But these norms applied identically whether the NBFC had Rs 500 crore or Rs 5 lakh crore in assets.
"To protect the interests of the depositors, deposit taking NBFCs (NBFC-D) were subject to prudential regulation on various aspects of their functioning. However, non-deposit taking NBFCs (NBFCs-ND) were subject to minimal regulation." — RBI/2008-09/116, August 2008
The IL&FS crisis triggered a fundamental rethink. As the RBI's own June 2020 Bulletin acknowledged, "the IL&FS related developments in 2018 brought the sector under greater market discipline" — but market discipline alone could not substitute for a regulatory framework that matched oversight intensity to actual risk (Press Release 2019-2020/2479).
What does the four-layer pyramid look like?
In October 2020, the RBI released a discussion paper on "Revised Regulatory Framework for NBFCs — A Scale Based Approach" (Statement on Developmental and Regulatory Policies, October 9, 2020). On October 22, 2021, the final framework arrived: Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs RBI/2021-22/112 (since withdrawn) — the hub node of the entire NBFC regulatory graph, with 33 downstream references.
"Regulatory structure for NBFCs shall comprise of four layers based on their size, activity, and perceived riskiness. NBFCs in the lowest layer shall be known as NBFC - Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively. The Top Layer is ideally expected to be empty." — RBI/2021-22/112, October 2021 (since withdrawn)
The four layers replaced the binary with a gradient, and the reason was deliberate: the RBI wanted regulation to intensify proportionally to systemic footprint, rather than clicking on at a single threshold.
Base Layer (NBFC-BL) covers all non-deposit-taking NBFCs with assets up to Rs 1,000 crore. These face the lightest regulation — basic prudential norms, minimal governance requirements, standard reporting. The vast majority of India's roughly 9,400 registered NBFCs sit here.
Middle Layer (NBFC-ML) captures NBFCs with assets between Rs 1,000 crore and Rs 5,000 crore, plus all deposit-taking NBFCs regardless of size, all NBFC-MFIs (microfinance institutions), all Housing Finance Companies, all Infrastructure Finance Companies, and all Infrastructure Debt Funds. The inclusion of deposit-takers at any size was triggered by a simple principle: if you hold public deposits, you face enhanced oversight even if you are small.
Upper Layer (NBFC-UL) consists of the top ten NBFCs by asset size, plus any others the RBI designates based on size, interconnectedness, complexity, and substitutability. On September 30, 2022, the RBI released the first Upper Layer list — 16 NBFCs including Bajaj Finance, LIC Housing Finance, Tata Sons, Muthoot Finance, and HDB Financial Services (Press Release 2022-2023/975). HDFC Limited was excluded despite qualifying by asset size, because its merger with HDFC Bank was already underway.
Top Layer (NBFC-TL) is reserved for any Upper Layer NBFC that the RBI determines poses extreme systemic risk. It remains empty — by design, because the framework is built to prevent any NBFC from reaching that level of risk.
What changes for Upper Layer NBFCs?
The reason Upper Layer designation matters is that it brings bank-equivalent regulation. NBFC-UL entities must maintain CRAR at the same level as scheduled commercial banks, comply with the large exposure framework that caps lending to single counterparties, implement board governance structures comparable to banks (including mandatory independent directors and board-level risk committees), and undergo enhanced supervisory scrutiny with more frequent on-site inspections.
The framework also introduced a common equity Tier 1 (CET1) requirement for Upper Layer NBFCs — the first time any NBFC category faced a CET1 mandate. This was carried forward into the Master Direction on SBR (Master Direction – Reserve Bank of India (Non-Bank) (since withdrawn), which consolidated the 2016 systemically important and non-systemically important Master Directions into a single SBR-structured document. Both predecessor directions — Master Direction for NBFC-SI (Master Direction - Non-Banking Financial Company -) (48 downstream references) and Master Direction for NBFC-NSI (Master Direction - Non-Banking Financial Company –) (34 downstream references) — were repealed and their content absorbed into the new direction. The binary "systemically important / non-systemically important" distinction was superseded by the four-layer pyramid.
How did the November 2025 consolidation reshape the framework?
The SBR structure was further operationalised on November 28, 2025, when the NBFC Registration and SBR Framework Directions 2025 (Reserve Bank of India (Non-Banking Financial Compa) replaced the October 2021 circular as the master registration document — with 126 downstream references, it became the single most-referenced NBFC direction in the RBI's regulatory database. Every other November 2025 NBFC direction — governance (Reserve Bank of India (Non-Banking Financial Compa), deposit acceptance (Reserve Bank of India (Non-Banking Financial Compa), IRAC (Reserve Bank of India (Non-Banking Financial Compa), concentration risk (Reserve Bank of India (Non-Banking Financial Compa), financial statements (Reserve Bank of India (Non-Banking Financial Compa) — specifies layer-wise applicability, with Base Layer NBFCs required to comply with Chapter II of each direction, Middle Layer with Chapter III, and Upper Layer with Chapter IV.
The consolidation amended the regulatory architecture by reorganising all NBFC directions by entity type rather than by subject. Before November 2025, a compliance officer at an Upper Layer NBFC needed to track the SBR circular, the Master Direction for systemically important NBFCs, separate governance circulars, and dozens of amending notifications. After November 2025, the same officer follows a structured set of self-contained directions, each specifying exactly which provisions apply to which layer. For the full story of that consolidation — how 9,445 circulars became 244 directions — see The November 2025 Consolidation.
Why is the minimum Net Owned Fund being raised?
The SBR framework included a phased increase in the minimum Net Owned Fund (NOF) requirement — from Rs 2 crore to Rs 10 crore by March 2027. The reason is straightforward: weeding out non-serious players. With roughly 9,400 registered NBFCs, many had been operating with minimal capital and negligible lending activity. Raising the NOF floor forces entities to either recapitalise or surrender their registration. The RBI has been cancelling NBFC registrations (PR_60862) at an accelerating pace — ten in a single July 2025 order alone. The intent is to shrink the denominator so that supervisory resources can be concentrated on entities that actually pose risk.
This phased approach was carried forward from the 2015 Revised Regulatory Framework RBI/2014-15/520, which had earlier consolidated the activity-based categories into a simpler structure and raised the threshold for "systemically important" classification from Rs 100 crore to Rs 500 crore.
Where does the SBR framework stand now?
The regulatory chain from the first "systemically important" circulars in 2006 through to the November 2025 consolidation spans 107 notifications across 20 years. The architecture has moved from a single binary classification (systemically important or not) to a four-layer gradient that applies different regulatory intensities to different sizes of NBFC. The old activity-based Master Directions (RBI_10586, RBI_10585) have been superseded. The SBR circular (RBI/2021-22/112) itself has been consolidated into entity-specific directions, with RBI_12965 as the new anchor document.
The Top Layer remains empty. The Upper Layer list is updated annually. And the framework's core logic — that regulatory intensity should scale with systemic footprint — is now embedded in every NBFC direction the RBI issues.
For the broader NBFC regulatory story, including the 1,566 notifications that trace the full evolution: NBFC Regulation — The Complete Timeline. For prudential norms — CRAR, NPA recognition, deposit rules, governance: NBFC Capital, NPA, Deposits, Governance.
Last updated: April 2026