RBI proposes to include PSUs in upper-layer NBFCs
As per the draft 'Reserve Bank of India (Non-Banking Financial Companies' Registration, Exemptions and Framework for Scale Based Regulation) Second Amendment Directions, 2026', upper layer NBFCs will be those having assets of over Rs 1 lakh crore.
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Context
The has released draft directions proposing a shift to an absolute asset-size criterion (Rs 1 lakh crore and above) for classifying Upper Layer . Crucially, the draft proposes including government-owned entities in this upper layer to ensure ownership-neutral regulation, while allowing them unlimited use of state government guarantees as credit risk transfer instruments.
UPSC Perspectives
Economic
To prevent systemic risks in the shadow banking sector, the previously introduced the [Scale Based Regulation] (SBR) framework, classifying into four layers: Base, Middle, Upper, and Top. The new draft simplifies the identification of Upper Layer NBFCs (NBFC-UL) by replacing a complex parametric scoring model with a straightforward asset-size threshold of Rs 1 lakh crore. This categorization carries stringent regulatory requirements, including mandatory public listing within specific timeframes. This regulatory evolution is particularly relevant for large [Core Investment Companies] (CICs) functioning as holding entities for major conglomerates, as it dictates their compliance, capital adequacy, and market disclosure norms.
Governance
A defining feature of the draft is the push for ownership neutrality in financial regulation. Historically, government-owned NBFCs or [Public Sector Undertakings] (PSUs) were confined to the base or middle layers of the regulatory framework, exempting them from the rigorous scrutiny applied to private NBFC-ULs. By bringing eligible state-run enterprises into the Upper Layer, the central bank is ensuring a level playing field. This reform acknowledges that large PSUs pose similar systemic risks to the economy as private entities. Bringing them under identical prudential norms reinforces the mandate of the [Reserve Bank of India Act, 1934] to ensure holistic macroeconomic and financial stability, regardless of who owns the financial institution.
Fiscal
The draft allows NBFC-ULs to utilize state government guarantees as a credit risk transfer instrument without any limits. In financial terms, credit risk transfer allows a lender to shift the potential loss of a default to a third party—in this case, the state government. While this lowers the capital requirement burden on the NBFCs by substituting it with sovereign backing, it fundamentally increases the contingent liabilities of state governments. For UPSC aspirants, this highlights a critical intersection between monetary regulation and state fiscal health. Over-reliance on state guarantees can mask true financial risks and stretch state finances, a concern frequently flagged under the disciplines of the [FRBM Act].