NBFCs have become systemically important to India’s credit landscape. Examine their growth, the IL&FS-DHFL lessons, and the new scale-based regulatory architecture.
Subtopic: Economy · NBFCs
How to structure your answer
Introduction: NBFC sector AUM crossed ₹50 lakh crore (RBI Financial Stability Report Dec 2024); credit to GDP from NBFCs ~13%; IL&FS (2018) and DHFL (2019) defaults reshaped supervision.
Body: 1) Scale-Based Regulation effective 1 Oct 2022 — Base, Middle, Upper, Top Layer with PCA-like norms. 2) Risk concerns — unsecured retail (RBI Nov 2023 risk weight increase to 125%), interconnectedness, ALM mismatch. 3) Governance — CFO and compliance officer norms; bank-NBFC co-lending caps.
Way forward: Operationalise NBFC-Upper Layer PCA; deepen corporate bond market; expand NaBFID's take-out finance window; supervisory colleges for large NBFCs.
Written within the word limit
224 words · target 250 words · 14 min
Introduction:
RBI's Financial Stability Report December 2025 places NBFC credit at ₹47 lakh crore — 25% of bank credit — with assets growing 17% YoY against 12% for banks. NBFCs, regulated under Chapter III-B of the RBI Act 1934, have become systemically important after the IL&FS default (September 2018) and DHFL collapse (2019), each triggering ₹91,000 crore in eventual losses to financial creditors.
Growth profile: NBFCs serve segments underbanked by SCBs — used-vehicle finance, gold loans (Manappuram, Muthoot), affordable housing (Aadhar, Aavas), micro-finance (Bharat Financial, IIFL Samasta), and infrastructure (PFC, REC, IIFCL). NBFC-MFIs disbursed ₹3.5 lakh crore by March 2026 (MFIN); NBFC-IFCs financed ₹13 lakh crore in power and roads.
IL&FS-DHFL lessons: Both crises revealed asset-liability mismatch (long-tenor infra loans funded by short-term commercial paper), opaque holdco structures, related-party diversion and supervision gaps. Mutual funds with ₹2.5 lakh crore NBFC exposure faced redemption pressure; RBI deployed Special Liquidity Schemes worth ₹30,000 crore.
Scale-based regulation: RBI's SBR Framework (effective October 2022) tiers NBFCs into Base (below ₹1,000 crore), Middle, Upper (top 50 by size, capital and risk-score) and Top Layers — each with graded prudential norms — leverage cap (7x for NBFC-D), CRAR floor, NPA recognition at 90 days, and a 2024 PCA framework. Bharat Bill Pay, ULI and the Public Tech Platform complement SBR.
Way forward:
RBI should operationalise full PCA for Upper Layer NBFCs by FY27, mandate Liquidity Coverage Ratio of 100% for systemically important NBFCs, and harmonise NBFC-bank resolution under IBC Section 227 to prevent contagion.
What an examiner expects to see
- NBFC AUM crossed ₹50 lakh crore (FSR Dec 2024)
- Scale Based Regulation since 1 Oct 2022
- Four layers: NBFC-BL, ML, UL, TL
- RBI Nov 2023 risk weight increase to 125% on unsecured
- IL&FS default 2018, DHFL admitted to IBC 2019
- Co-lending guidelines 2020 (bank-NBFC)
Concrete cases, schemes and judgments
- IL&FS resolution under Section 241/242
- DHFL — first NBFC under IBC
- Bajaj Finance and Bajaj Housing IPO
- RBI cancellation of NBFC licences