Introduction
Non-Banking Financial Companies (NBFCs) play a very important role in India’s financial system. They give loans to people and businesses that regular banks often do not reach. They support small businesses, microfinance groups, infrastructure projects, and vehicle loans.India’s non-bank lending market is also very large. It is the third biggest in the world, after the United States and the United Kingdom.
But after 2018, some big NBFCs failed, like IL&FS and DHFL. These failures showed that many NBFCs had serious financial problems. They also showed that if an NBFC collapses, it can hurt the entire financial system.Because of this, the Reserve Bank of India (RBI) changed its approach. Earlier, rules for NBFCs were lighter. Now, RBI follows a stricter and risk-based system.
This article looks at whether these stricter rules—such as the Scale-Based Regulation (SBR), new rules for classifying assets, and strong liquidity requirements—have made the system safer. It also asks if these rules have slowed down the growth of NBFC lending.Using RBI circulars, Master Directions, and Financial Stability Reports, the article studies whether this trade-off between stability and growth is necessary and useful.
Background: Structural Weaknesses and Crisis Triggers
In the last ten years, NBFCs grew very fast. They gave out a lot of loans and expanded quickly. But this growth came from risky practices.They borrowed most of their money for the short term, even though they gave long-term loans. This created a big mismatch between the time they got money and the time they had to repay it.NBFCs also depended heavily on Liquid Debt Mutual Funds and Commercial Paper to raise money. These sources helped them grow fast, but they also made NBFCs face high risk. If they could not borrow again in time, they would struggle to repay their earlier loans.
The weakness in the NBFC sector became clear after IL&FS failed in 2018 and DHFL collapsed in 2019. These events scared investors. Many of them quickly took out their money.Because of this, many NBFCs faced a serious money crunch. They could not get new funds, and the whole sector struggled with low liquidity.The problem did not stop with NBFCs.
It also affected banks because NBFCs and banks were closely linked. This spread the crisis further.These events showed a clear gap in regulation. Large NBFCs were very important for the financial system, but they were not supervised as strictly as banks.So, the situation made it necessary for the RBI to shift to stronger and wider rules to protect the entire system.
RBI’s Major Regulatory Reforms (2018–2025)
1. Scale-Based Regulation (SBR)
The RBI introduced the Scale-Based Regulation in 2021 and strengthened it further in 2023 and 2025. Under this system, NBFCs are placed into four groups based on their size and level of risk. These groups are: Base Layer, Middle Layer, Upper Layer, and Top Layer.
Bigger and riskier NBFCs must follow stricter rules. Smaller NBFCs have lighter rules.
The main rules under SBR include:
- Each NBFC must have at least ₹10 crore as Net Owned Funds (NOF).
- They must follow stronger rules for governance and risk control.
- NBFCs in the Upper Layer must follow rules similar to banks, including ICAAP and other prudential norms.
2. Tightening of NPA Norms
The RBI has decided that NBFCs must follow the same rules as banks for marking a loan as a Non-Performing Asset (NPA). Earlier, NBFCs treated a loan as an NPA only after 180 days of non-payment. Now, they must treat it as an NPA after 90 days. This rule will apply fully by 2026.This change helps NBFCs spot problem loans earlier. It also improves the overall quality of their loan books.
3. Liquidity Coverage Ratio (LCR)
Large and important NBFCs must now keep enough High-Quality Liquid Assets. These assets should be enough to help them manage a tough 30-day period without new funds.This rule helps fix the earlier problems where NBFCs did not match their borrowing and lending timelines properly.
4. Digital Lending Guidelines (DLG)
The RBI issued new digital lending rules in 2022 and made them stronger in 2025. These rules include:
- NBFCs must give a Key Fact Statement so borrowers clearly understand all charges and terms.
- Money must move directly between the borrower and the NBFC, without middlemen.
- The fees charged by Lending Service Providers (LSPs) must follow RBI limits.
- All loan agreements must use digital contracts with e-signatures.
These steps make lending safer. They reduce unfair practices and stop predatory lending.
Credit Growth Impact: Trends and Data
1. Stronger Financial Position
The recent reforms have made NBFCs financially stronger.
- Their CRAR was 26.6% in March 2024, which is much higher than the minimum required level.
- Their Gross NPA (GNPA) fell to 4%, which shows better control over bad loans.
- Private NBFCs also improved a lot. Their GNPA dropped from 10.6% in 2021 to 6.3% in 2023.
These improvements happened because NBFCs started making safer provisions, followed better loan-checking practices, and began adjusting early to the new 90-day NPA rule.
2. Slower Growth in High-Risk Loans
The stricter rules have reduced the fast growth of unsecured retail loans. The RBI stepped in because these loans were becoming too risky.As a result, NBFCs are now growing at a slower and safer pace. This has limited their balance sheet expansion, but it has also helped stop bigger problems that could have happened in the future.
3. Ongoing Strength in Important Sectors
Even with stricter rules, NBFCs are still doing well in key productive areas.
- NBFCs that lend to MSMEs are expected to grow their assets by about 20% every year in FY25–26.
- NBFCs also hold 45% of the market in Micro Loan Against Property (Micro-LAP) lending.
These facts show that while risky loan areas are slowing down, NBFCs continue to support important sectors that help financial inclusion.
Stability vs. Growth: A Balanced Evaluation
A. Stability Benefits
The new reforms have made the NBFC sector much safer.
- The LCR and ALM rules help stop money shortages like the one seen during the IL&FS crisis.
- The Scale-Based Regulation (SBR) makes sure large NBFCs have strong governance, better risk systems, and more capital.
- The Digital Lending Guidelines (DLG) help build public trust in online lending.
All these changes work together to reduce the chance of problems spreading to banks. They also increase confidence in the entire shadow banking system.
B. Limits on Growth
The new rules also bring some challenges.
NBFCs now have to spend more money to follow the stricter regulations. This is especially hard for smaller NBFCs that are moving from the Base Layer to the Middle Layer. They may struggle to invest in better risk systems, data tools, and strong governance structures.The 90-day NPA rule also makes NBFCs more careful while giving loans. Because of this, they may reduce lending to borrowers who are already in weak financial positions.
C. Is the Trade-Off Worth It?
Yes, it is worth it. The problems during the 2018–19 crisis were very serious. If the RBI did not introduce stronger rules, the same mistakes could happen again.The RBI has designed the rules carefully. Only the big and important NBFCs must follow bank-like regulations. Smaller NBFCs still have more freedom and lighter rules.
Other countries are also doing the same. Regulators in the U.K. (FCA) and the European Union (ESRB) have also made stricter rules for non-bank lenders. This supports and confirms the RBI’s approach.
Case Studies
Case 1: Better Asset Quality After SBR
Private NBFCs saw a big drop in their bad loans, from 10.6% to 6.3%. This shows that the SBR rules and the early shift to the 90-day NPA rule worked quickly. NBFCs cleaned up their loan books, improved their governance, and used stronger methods to check borrowers before giving loans.
Case 2: Strong MSME and Micro-LAP Lending
Even with stricter rules, NBFCs still lead in MSME loans and Micro-LAP lending. They are good at serving these sectors because they understand their needs and work closely with customers.The SBR system helps this by keeping lighter rules for smaller NBFCs, so they can continue lending in these important areas.
Case 3: Slower Growth in Unsecured Loans
The RBI’s stricter rules slowed down unsecured lending. This was done on purpose to avoid too much lending in this risky segment. It also helps prevent a rise in bad loans in the future.Overall, this supports safer and more sustainable lending over the long term.
Key Policy Challenges
1. Pressure on Smaller NBFCs
When a small NBFC grows and moves into the Middle Layer, it must follow many more rules. This creates extra work and higher costs. Because of this, some smaller NBFCs may hesitate to grow further.
2. Confusion in Fintech–NBFC Rules
Fintech companies and NBFCs often work together through co-lending and digital partnerships. But sharing risk in these partnerships is not always clear. The draft co-lending rules of 2025 say that both partners must classify loans in the same way. Still, there is no single, unified framework for all fintech–NBFC activities. More clarity is needed.
3. Risk Shifting to Unregulated Players
Stricter rules for NBFCs may push risky lending toward unregulated lenders. This can create new dangers outside the formal system. The RBI will need to monitor this area closely.
Way Forward
1. Regulate Based on Activity: Instead of regulating NBFCs mainly by their size, the RBI should also regulate specific risky activities. For example, high-risk lending should have strong rules no matter who is doing it.
2. Improve Digital Supervision: The RBI should use better digital tools, such as AI-based systems, to watch NBFCs in real time. This will help spot early warning signs faster than the current system of periodic reports.
3. Build Strong Long-Term Funding Sources: India needs a deeper corporate bond market. This will help NBFCs get more long-term money and reduce their heavy dependence on short-term borrowing.
4. Create One Common Conduct Framework: The Fair Practices Code and the Digital Lending Guidelines should be combined into one single rulebook. This will ensure that all customers get the same level of protection.
Conclusion
RBI’s rules since 2018 show a clear move toward making the NBFC sector safer. The SBR framework, the shift to the 90-day NPA rule, and the requirement to keep strong liquidity have all made NBFCs more stable. This is visible in their high capital levels and better loan quality.Although the stricter rules have slowed down high-risk lending, NBFCs are still growing in important areas. Lending to MSMEs and Micro-LAP borrowers continues to rise. This shows that the balance between safety and growth is fair, reasonable, and in line with global standards.Going forward, RBI should focus on regulating specific risky activities and using better digital tools for supervision. This will help NBFCs stay strong, safe, and innovative. It will also support India’s long-term credit needs and help more people get access to finance.
References
- Ministry of Finance, Government of India, Economic Survey 2020–21, Chapter 8.
- International Monetary Fund, Article IV Consultation and Financial Sector Assessment Program (Referencing India’s NBFI systemic risks).
- KPMG in India, Scale-based framework – the revised regulatory framework for NBFCs (June 2022).
- Reserve Bank of India, Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023, RBI/DoR/2023-24/106, dated July 17, 2025.
- Reserve Bank of India, Press Release on Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs, dated October 22, 2021.
- Reserve Bank of India, Clarification on implementation of asset classification norms for NBFCs, October 2023 (Referencing the glide path implementation by March 2026).
- Reserve Bank of India, Guidelines on Digital Lending, dated September 02, 2022.
- Reserve Bank of India, Draft Directions on Co-Lending Arrangements, April 2025.
- Reserve Bank of India, Financial Stability Report, June 2024.
- Vivriti Capital, Peeling the Layers: A Review of the NBFC Sector in Recent Times (Citing RBI Report Data on GNPA).
- CareEdge Estimates, MSME AUM for NBFCs to cross Rs 5.3 lakh crore by FY26 (May 2025).
- KPMG in India, Scale-based framework – the revised regulatory framework for NBFCs (June 2022).
- Reserve Bank of India, Statement on Developmental and Regulatory Policies (Net Owned Funds requirement for NBFCs).
- Reserve Bank of India, Speech on Proportionality in Regulations.24
- UK Financial Conduct Authority (FCA), Speech on non-bank financial intermediation (NBFI) leverage, February 2025.
- European Systemic Risk Board (ESRB), Systemic risks from non-bank financial intermediation (2025).
- European Central Bank (ECB), Governing Council member speech on oversight of Non-Bank Financial Intermediation (NBFI).
Author and Co-Author
Ankit Kumar&Bijendra Shandilya
4th Year, 5-Year B.B.A. LL.B. Programme
Indian Institute of Management, Rohtak
