In the 1990s, several non-banking financial companies collapsed — taking depositors' money with them. CRB Capital Markets, Peerless General, and dozens of smaller companies had raised public deposits with promises of high returns and no regulatory oversight. The RBI responded with a registration requirement, minimum capital norms, and deposit-acceptance restrictions. But the regulatory framework remained light compared to banks — which is exactly what attracted the next generation of NBFCs.
By 2020, the NBFC sector had grown to rival the banking system in size. Infrastructure lenders, housing finance companies, gold loan specialists, micro-finance institutions, fintech platforms — all operating under a framework that classified them by activity rather than by systemic importance. The IL&FS collapse of 2018 — India's Lehman moment — proved that a sufficiently large NBFC failure could threaten the entire financial system.
The RBI's response was the October 2021 Scale Based Regulation (SBR) framework, which replaced the activity-based classification with a four-layer structure based on size, interconnectedness, and systemic risk. In November 2025, the consolidation produced 14 entity-specific NBFC Master Directions — more than any other entity type — covering registration, governance, capital adequacy, credit facilities, KYC, stressed asset resolution, deposit acceptance, and half a dozen other areas.
1,566 notifications trace this evolution. 311 are unique to NBFCs, not covered by any prior topic.
Also in this series:
- The Scale Based Regulation Framework
- NBFC Prudential Norms: Capital, NPA, Deposits
- How PMC Bank Failed (co-operative bank failure, but the governance lessons apply to NBFCs)
- KYC & Anti-Money Laundering (NBFC KYC covered there)
The Evolution: Activity-Based to Scale-Based
Phase 1: The Deposit Crisis Response (1996–2006)
After the deposit-taking NBFC collapses of the mid-1990s, the RBI:
- Made registration mandatory under Section 45-IA of the RBI Act, 1934
- Set minimum Net Owned Funds (NOF) requirements
- Classified NBFCs by activity: Asset Finance Companies, Loan Companies, Investment Companies, Infrastructure Finance Companies
- Distinguished between deposit-accepting (NBFC-D) and non-deposit-accepting (NBFC-ND)
The scale-based overhaul was preceded by a December 2020 discussion paper that outlined the four-layer approach for the first time — see RBI releases Discussion Paper on Revised Regulatory Framework for NBFCs - A Scale-Based Approach (PR_51011).
- Created a separate category for systemically important non-deposit-accepting NBFCs (NBFC-ND-SI) — those with asset size above Rs 100 crore
Phase 2: Systemically Important NBFCs (2006–2014)
The December 2006 circular RBI/2006-07/205 (22 downstream refs) introduced the concept of systemic importance for NBFCs, followed by the April 2007 supervisory framework (Supervisory Framework for Systemically Important n) (20 downstream refs).
The August 2008 guidelines RBI/2008-09/116 (35 downstream refs) prescribed capital adequacy, liquidity, and disclosure norms specifically for NBFC-ND-SI.
The October 2008 capital enhancement (Enhancement of NBFCs’ capital raising option for c) (29 downstream refs) expanded capital-raising options for NBFCs to meet the new adequacy requirements.
Phase 3: New NBFC Categories (2011–2020)
The sector diversified rapidly:
Core Investment Companies (January 2011): Core Investment Companies Framework RBI/2010-11/360 (since withdrawn) (33 downstream refs) created the regulatory framework for holding companies that exist primarily to hold group investments.
NBFC-MFIs (December 2011): NBFC-MFI Category Creation RBI/2015-16/250 (since withdrawn) created the micro-finance institution category following the Andhra Pradesh microfinance crisis.
Gold Loan NBFCs (May 2012): Gold Loan NBFC Norms RBI/2011-12/568 (since withdrawn) (24 downstream refs) tightened norms for NBFCs predominantly engaged in lending against gold — a rapidly growing segment.
NBFC-P2P, NBFC-AA, NBFC-Factor: New categories for peer-to-peer lending platforms, account aggregators, and factoring companies.
Housing Finance Companies: Transferred from NHB regulation to RBI regulation in 2019 — a significant expansion of the RBI's NBFC supervisory perimeter.
Phase 4: Scale Based Regulation (October 2021–Present)
The four-layer pyramid replaced the activity-based classification:
| Layer | Criteria | CRAR | Governance |
|---|---|---|---|
| Top Layer | RBI designation based on systemic risk | Enhanced, as specified | Most stringent |
| Upper Layer | Asset size ≥ Rs 1,000 crore + top 10 by asset size | 15% (with Tier 1 minimum 10%) | Listed on stock exchanges, independent directors, CRO, CCO |
| Middle Layer | Deposit-accepting NBFCs, NBFC-ND with asset ≥ Rs 1,000 crore, CICs, HFCs, IFCs, IDFs, SPDs | 15% | Board committees, risk management, compliance |
| Base Layer | All other NBFCs (asset < Rs 1,000 crore, non-deposit) | 15% | Basic governance |
Phase 5: The November 2025 Consolidation
14 entity-specific NBFC Master Directions — more than any other entity type:
The Governance Direction: Layered Requirements
The Governance Direction (Reserve Bank of India (Non-Banking Financial Compa) (120 downstream refs) prescribes escalating governance requirements by layer:
All NBFCs (Chapter III):
- Board experience requirements
- Risk Management Committee
- Change in directors requires reporting
Middle Layer and above (Chapter IV):
- Independent directors mandatory
- Audit Committee, Nomination Committee
- Chief Risk Officer, Chief Compliance Officer
- Compensation framework for Key Managerial Personnel
Upper Layer (Chapter V):
- Most stringent governance — mandatory listing, enhanced disclosures
The Credit Facilities Direction
The NBFC Credit Facilities Direction (Reserve Bank of India (Non-Banking Financial Compa) (42 downstream refs) covers digital lending, gold loan LTV ratios, microfinance, project finance, and non-fund-based credit — with specific chapters mirroring the bank Credit Facilities Directions but calibrated for the NBFC model.
Digital lending chapter establishes the relationship between NBFCs and Lending Service Providers (LSPs) — the fintech platforms that originate loans on behalf of NBFCs. The NBFC remains fully responsible for all acts of the LSP.
The Wilful Defaulter Framework
The Wilful Defaulter Direction (Reserve Bank of India (Non-Banking Financial Compa) (86 downstream refs) creates a non-discriminatory procedure for classifying borrowers as wilful defaulters, with credit information dissemination to prevent further institutional lending to such entities.
Cross-Topic Connections
KYC/AML: The NBFC KYC Direction (Reserve Bank of India (Non-Banking Financial Compa) mirrors the bank KYC directions — same beneficial ownership thresholds (10%), same V-CIP provisions, same UNSC screening. NBFCs that are also FEMA Authorised Persons follow the bridge circular RBI/2025-26/99.
Co-Lending with Banks: The Co-Lending Model RBI/2020-21/63 allows NBFCs to partner with banks for PSL origination — NBFC retains 20% risk, bank gets PSL classification for its share. This connects NBFC regulation to both PSL and co-operative bank frameworks.
FEMA: NBFCs can raise ECBs under the ECB framework for on-lending to infrastructure. NBFC-ND-SIs have been eligible since the 2005 ECB policy RBI/2005-06/87. Investment in NBFCs from FATF non-compliant jurisdictions is restricted (FATF Non-Compliant Jurisdiction Restrictions (Investment in NBFCs from FATF non-compliant jurisd) (since withdrawn)).
Sub-Topic Distribution
Last updated: April 2026