For twenty-five years, the RBI regulated NBFCs by what they did — asset finance, loan, investment, infrastructure, core investment, micro-finance. An NBFC lending against gold and an NBFC funding a highway project sat in different regulatory boxes with different capital requirements, different governance standards, and different reporting obligations. The IL&FS collapse in 2018 showed that the boxes were wrong. A systemically important infrastructure lender could bring down the entire commercial paper market regardless of which regulatory box it sat in.
In October 2021, the RBI replaced activity-based classification with a four-layer pyramid based on size, interconnectedness, and systemic risk — the Scale Based Regulation (SBR) framework. Base Layer for small NBFCs. Middle Layer for deposit-takers and larger non-deposit entities. Upper Layer for the top ten by asset size plus any NBFC above Rs 1,000 crore designated by the RBI. Top Layer reserved for entities the RBI considers a specific systemic risk — currently empty, because the framework is designed to prevent any NBFC from getting there.
107 notifications trace the evolution from the first "systemically important" classification in 2006 to the comprehensive SBR framework of 2025.
See also: NBFC Regulation — The Complete Timeline
For the narrative of how IL&FS triggered Scale Based Regulation and the four-layer NBFC pyramid — see How the RBI Tiered 10,000 NBFCs by Risk.