Inside This Article
Index
- Introduction
- What Are Exposure Norms & Why Do They Matter?
- What Exactly Counts as “Exposure”?
- Who Must Follow These Rules?
- What is the Large Exposure Framework (LEF)?
- Timeline and Scope of LEF
- What are the Exposure Limits?
- What Are the Exemptions & Methods to Offset Exposure?
- What Are the Capital Frameworks & Risk-Weight Impacts?
- What Are the Most Recent Exposure Norm Updates (2025)?
- Where Can You Find the Official Rules?
- Market & Industry Response
- Strategic Takeaways
- Final word
Introduction
Non-Banking Financial Companies (NBFCs) play a crucial role in India’s economy. They provide loans to small and medium-sized enterprises (MSMEs), individuals purchasing homes, those requiring gold loans, and other regular borrowers. They help where banks cannot, especially in villages and small towns. economictimes.indiatimes.com.
However, if an NBFC lends excessive amounts to a single borrower, a specific group, or high-risk sectors such as real estate, it can be hazardous. If that money is not paid back, the NBFC could face big losses. This can even affect banks because NBFCs and banks often work together with money.
To stop this from happening, the RBI has made rules. These rules require NBFCs to lend to a wide range of individuals and businesses, not just a select few. They must also keep enough money saved (capital buffers) to handle risks. This helps keep NBFCs and the whole financial system safe and strong.
What Are Exposure Norms & Why do they Matter?
Concentration of exposure is risky. Exposure norms cap how much credit (or “exposure”) an NBFC can have to any single borrower or connected group. If a single borrower or a particular industry faces trouble, the impact can reverberate across the NBFC’s balance sheet, potentially triggering systemic stress. That is why exposure norms encourage broader risk distribution and more substantial capital buffers. This protects businesses against significant losses if that borrower defaults, and it guards the wider financial system from spill‑over risk.
Legal Basis: Chapter X, Paras 91.1–91.2 (credit/investment concentration)
What Exactly Counts as “Exposure”?
- Fund-based exposure involves money that has already been disbursed, cash credit, term loans, and investments.
- Non-Fund-Based Exposure covers commitments, such as guarantees or letters of credit, as well as underwriting commitments.
Who Must Follow These Rules?
Under the RBI’s Scale‑Based Regulation (SBR):
- Base‑Layer NBFCs (BL): General prudential norms; no detailed exposure limits.
- Middle‑Layer NBFCs (ML): Subject to concentration limits (25% of Tier I for one borrower; 40% for a group).
- Upper‑Layer NBFCs (UL): Must follow both concentration limits and the Large Exposure Framework (LEF) (identify & report exposures ≥ 10% of Tier I, board‑approved policies, quarterly returns).
What is the Large Exposure Framework?
From October 1, 2022, the Large Exposure Framework (LEF) requires NBFC-ULs to:
- Identify exposures ≥ 10% of Tier‑1 capital (“large exposures”).
- Include both on- and off-balance-sheet exposures in the calculation.
- Recognise economically connected counterparties (e.g., shared revenue sources, payment guarantors) even below the 10% threshold if exposures exceed 5%.
- Adhere to reporting, governance, and disclosure norms via board-approved policies, internal controls, and supervisory submissions.
The LEF ensures that NBFCs monitor and limit concentration risks with the same rigour as banks.
Timeline and Scope of LEF
Timeline:
- October 2021: SBR introduced categorisation of NBFCs.
- October 1, 2022: LEF applied on a solo and consolidated basis to NBFC-ULs.
Scope:
These norms apply across India to NBFC-ULs, including subsidiaries and affiliates under consolidation. Non-upper-layer NBFCs follow simpler exposure rules under older concentration norms.
What Are the Exposure Limits?
These thresholds protect against excessive concentration while allowing strategic flexibility.
What are the Exemptions & Methods to Offset Exposure?
- Sovereign and state government loans (0% risk weight)
- Government-guaranteed instruments
- Investments in related firms are already deducted from Teir- I capital
- RBI-approved insurance equity stakes
These exemptions let NBFCs allocate capital efficiently while upholding prudential standards.
How to offset?
By taking collateral, credit-default swaps, or government guarantees (e.g., cash margin, state government guarantees, CDS hedges—up to 80% recognition).
This enables better liquidity and capital conservation.
Legal Basis: Chapter XIV, Para 110.6 (measurement and credit risk mitigation)
What Are The Capital Frameworks & Risk-Weight Impacts?
Capital Rules
NBFC-ULs must maintain Common Equity Tier 1 (CET1) of at least 9% of risk-weighted assets, within a total capital requirement of 15%. They also require an internal capital assessment process and differential provisioning for standard assets.
Risk Weight Changes
- A 125% risk weight for unsecured consumer and credit-card loans means higher capital charges.
- Removing the 25% bank surcharge on NBFC lending (from April 1, 2025) reduces funding costs.
NBFCs now combine disciplined capital buffers with improved access to funding.
What Are the Most Recent Exposure Norms Updates (2025)?
| Update | Effective Date | Key Changes & Impact |
| MFI Asset Ratio Relief | June 6, 2025 | MFI portfolios must now hold only 60% in microloans (↓ from 75%)—opening 40% to other small loans. |
| Bank Surcharge Rollback | April 1, 2025 | Eliminates the 25% surcharge on bank lending to NBFCs, making funding cheaper. |
| Gold-Loan Reform | April 1, 2026 | Gold loans of up to ₹2.5 lakh now offer 85% Loan-to-Value (LTV) with no credit check; a tiered approach follows. |
| Mandatory Exposure Disclosures | January 2024 | NBFC-ULs must report significant exposures, breaches, and policies in their annual reports. |
| Draft LAGC Rules | April 2025 | Proposes gold valuation standards, purity checks, caps, and end-use monitoring. |
Collectively, these updates offer diversification, more affordable funding, support for small borrowers, and enhanced transparency.
Where Can You Find the Official Rules?
Master Direction: RBI – NBFC – Scale Based Regulation Directions, 2023 (Updated May 5, 2025) .
Chapters:
- Credit Concentration: Chapter X, Paras 91.1–91.2
- LEF: Chapter XIV, Paras 110.5–110.7
Market & Industry Response
- Post-announcement gains of over ₹2 lakh crore in the NBFC market cap signal investor optimism.
- Gold-lending NBFCs, such as Muthoot and Manappuram, saw share price increases of 4–7%.
- The removal of the funding surcharge has improved bank-borrowing sentiment, reducing reliance on commercial paper.
Strategic Takeaways
- Map Your Exposures– Build a register of on‑ and off‑balance sheet exposures with counterparty and group tagging.
- Diversify carefully—Revisit lending programs with exposure limits in mind.
- Plan capital effectively—Ensure buffers reflect higher weights on unsecured loans.
- Explore new funding avenues—Leverage cheaper bank finance post-surcharge rollback.
- Collateral Strategies-Identify eligible collateral/guarantee arrangements to offset exposures.
- Expand responsibly—Gold-loan changes support broader access to credit.
- Systems & Reporting-Upgrade MIS to flag exposures ≥ 5% (connected) and ≥ 10% (large) of Tier I.
- Maintain transparency—Ensure exposure policies, breach procedures, and disclosures are board-approved and published.
- Audit & Compliance-Schedule internal audits to verify limits and report quarterly to RBI.
Final Word
RBI’s exposure norms for NBFCs in India offer an advanced, balanced framework—prioritising risk control while allowing operational flexibility. With prescribed limits, well-defined exemptions, layered capital norms, and recent enhancements, this system empowers NBFCs to grow responsibly and inclusively. Solid governance, vigilant monitoring, and exposure norms for NBFCs in India lay a strong foundation for sustained financial resilience.
https://www.rbi.org.in/Scripts/BS_NBFCNotificationView.aspx?Id=12298&utm_source
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