NBFCs - Concentration Risk - Notes on Reserve Bank of India

Main Note - [NBFCs](NBFCs.md) This note reviews changes in the guidelines for NBFCs to address concentration risk. 1. The concentration of exposures to a single counterparty or a group of connected counterparties poses significant risks. 2. RBI while adopting a proportionate approach, recognized the need of robust risk management and therefore advised to address concentration of credit / investment by; 1. imposing certain regulatory restrictions, 2. fix internal exposure limits to avoid any undesirable concentration in specific geographical locations, 3. and establish exposure norms as per regulatory prescriptions. ## November 28, 2025 - Directions Nov 28, 2025 - [Master Direction – Reserve Bank of India (Non-Banking Financial Companies - Concentration Risk Management) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12953) (hereinafter referred as the 'Master Direction') were issued. ### Aug 25, 2026 - 4th Amendment Banks can now increase their exposure to the infrastructure sector through their IDF-NBFC group entity. The large exposure limits (concentration risk) applicable to NBFC-IFC (NBFC-Infrastructure Finance Company) shall also be applicable to IDF-NBFC (Infrastructure Debt Fund-NBFC) which are subject to the regulations of the upper layer, according to the [Reserve Bank of India (Non-Banking Financial Companies – Concentration Risk Management) Fourth Amendment Directions, 2026](https://rbi.org.in/scripts/NotificationUser.aspx?Id=13679&Mode=0) 1. What are the large exposure (credit concentration) limits? 1. For all NBFCs (other than NBFC-IFCs) $=$ 20% $+$ 5% (Route 1 - Board approval with written justification) OR 5% (Route 2 - Infra loan/debt-like) of Tier-1 capital to a single borrower, but subject to a limit of 25% of Tier-1 capital to a single borrower. 2. For NBFC-IFC (now also for bank backed IDF-NBFCs) (Max 30%) $=$ 20% $+$ 5% (only for IFCs) $+$ 5% (Board approval with written justification) of Tier-1 capital to a single borrower, but subject to a limit of 30% of Tier-1 capital to a single borrower. 3. If multiple borrowers are linked, they are treated as one single "group" and the limits are higher. 2. Why was there a need for the amendment? 1. NBFCs’ industrial credit fell in June-26 vs May-26, largely due to deceleration in credit growth to infrastructure, as mentioned in RBI's August bulletin. 2. Some banks had also asked RBI for the relaxation. 3. Why does it impact banks? 1. As of now, all IDF-NBFC belong to the middle layer as mentioned in [RBI (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12965). But if the IDF-NBFC is part of the group entity (subsidiary, joint venture, associate, or related party) of a Scheduled Commercial Bank (SCBs), the regulations as applicable to NBFC – Upper Layer, other than the requirement of listing, shall be applicable to the IDF-NBFC. So this amendment impacts all bank-backed IDF-NBFCs, and the parent banks like Kotak, ICICI, IDFC, etc. 4. How does it impact banks? 1. The increased limit will help banks increase their exposure (indirectly) to large projects. 2. ==But the spillover of this higher concentration risk to the parent bank is contained.== Under RBI's Group Exposure Framework/Intra-Group Transactions and Exposures (ITE) norms covered in [Reserve Bank of India (Commercial Banks – Concentration Risk Management) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=13152), a bank’s total exposure to its own financial subsidiaries/group entities is strictly capped at 10% of the bank's Tier-1 capital for a single group entity and 20% for all group entities combined. 3. So in a way, a bank-backed IDF-NBFCs can function as a channel for funding large infrastructure without banks taking the long-term risk entirely on their own balance sheets. 5. What are the key differences between IDF-NBFC and NBFC-IFC? 1. IDF-NBFC - They can only refinance (secondary lender) infrastructure projects that have already completed at least one year of satisfactory commercial operations post-COD, by buying out/refinancing bonds or loans from existing infra lenders (banks/IFCs); or finance Toll-Operate-Transfer (TOT) projects as the direct (primary) lender. There is no 75% asset-deployment-in-infrastructure rule like NBFC-IFC, but IDF-NBFCs cannot deploy assets in any business other than these two permitted activities. In India, Infrastructure Debt Funds (IDFs) are either IDFs-NBFC, regulated by RBI, or IDF-Mutual Fund regulated by SEBI. 2. NBFC-IFC - They can provides credit facility by way of: (a) term loan, (b) project loan, (c) subscription to bonds/debentures/preference shares/equity shares in a project company as part of project finance package (in the nature of advance), OR (d) any other long-term funded facility for exposure in ONLY infrastructure sub-sectors. This list of infra sub-sectors is notified by the DEA, not RBI. 3. Both NBFC-IFC and IDF-NBFC must have a NOF of at least ₹300 crore. 4. Both can function ONLY as lenders, and NOT as equity investors. 6. Summary: 1. Asset Liability Management (ALM) - Asset-side concentration limits control lending-risk to a single borrower, and liability-side (IBL) limits control borrowing-risk/systemic inter-connectedness between entities (like limit on inter-bank liabilities for banks) themselves. Both exist simultaneously because they guard against two different failure modes. It is like "I lent too much to one entity" vs. "I depend too much on other banks' short-term money" , and so if the system panics, I'm in trouble. 2. Liability-side concentration limits - Instead of explicit % on single liability counterparties (unlike commercial banks, which face a strict prudential [limit for inter-bank liabilities](https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=13147), RBI manages NBFC liability-side risk primarily through [Reserve Bank of India (Non-Banking Financial Companies – Asset Liability Management) Directions](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12949 qualitative governance mandates (Board-approved funding diversification policy, ALCO oversight) rather than a numeric cap on borrowing concentration from any single source, unlike the explicit Inter-Bank Liability (IBL) limits imposed on banks. ### Aug 25, 2026 - 3rd Amendment Here four key changes are done. 1. April 2026 - [DRAFT directions](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4977) were issued. 2. June 24, 2026 - [RBI (Non-Banking Financial Companies – Concentration Risk Management) Third Amendment Directions, 2026](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=13540) were issued. 3. **It removes exemptions (related to credit/investment concentration) for Government-Owned NBFCs** 1. Government NBFCs no longer get special exemptions. They must now follow the exact same single/group borrower exposure limits as private NBFCs based on their scale layer. Existing excess loans are allowed to run off until maturity, but no new unhedged loans can be added. 2. It will impact NBFCs like PFC, REC, IREDA. 3. Allows Fully-Hedged Extra Exposure - Government NBFCs in the Middle and Upper Layers can only lend beyond the standard limits if the extra amount is 100% covered by eligible credit risk transfer tools (e.g., formal guarantees), ensuring zero net risk. 4. **New Rules for State Government Guarantees (only for Upper Layer NBFCs)** 1. For Upper-Layer NBFCs, If a loan exposure is backed by a state government guarantee, it now counts as an exposure to that state government (not the original borrower). 2. Such loans do not count toward prudential exposure limits, but they must assign a **20% risk weight** to them. 5. **Increase in Group Limits for NBFCs-IFCs:** 1. Upper-Layer Infrastructure Finance Companies (NBFC-IFCs) - They can now exceed the exposure limit for a _group of connected counterparties_ by 20% of their Tier 1 capital. 2. So they can now take a higher total exposure of up to **45% of Tier 1 capital** to a connected group of borrowers ### March 10, 2026 - 2nd Amendment 1. [January 13, 2026](https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=4825) - Draft for comments were issued. 2. [March 10, 2026](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=13312) - RBI (Non-Banking Financial Companies - Concentration Risk Management) Second Amendment Directions, 2026 were issued. Here we see changes in definitions. 3. "Owned Fund" definition - The definition already used in RBI's Capital Adequacy Directions, 2025 will be applicable here too. 4. "Tier 1 capital" definition updated - The definition already used in RBI's Capital Adequacy Directions, 2025 will be applicable here too. 1. But if an NBFC increases its capital (say, by raising fresh Tier 1 capital) and wants that increase to count for concentration-limit calculations, it must first get an external auditor's certificate confirming the capital addition is complete, and submit it to RBI's Department of Supervision before it can count that extra capital. 5. New clarification added: 1. When checking if an NBFC is within its exposure limits (paragraphs 13 & 14 of the main Directions), the Tier 1 capital figure to use is the one from its latest audited or limited-review financial statements, and not some current/live number. ### Jan 1, 2026 - Amendment 1. January 1, 2026 - RBI (Non-Banking Financial Companies - Concentration Risk Management) Amendment Directions, 2026 was issued. 2. A new category called high-quality infrastructure project was created. 3. On the same day, RBI issued [RBI (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Amendment Directions, 2026](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=13244&Mode=0), where such projects were assigned lower risk weight 4. So these amendment directions shall be applicable when the NBFC decides to implement the [Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Amendment Directions, 2026](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=13244&Mode=0) or from April 1, 2026, whichever is earlier. ## April 19, 22 - LEF for NBFCs-Ul 1. April 19, 2022 - A Revised Regulatory Framework for NBFCs was issued, where a Large Exposure Framework (LEF) was prescribed for NBFCs in the Upper Layer. ## Oct 22, 21 - Scale Based Regulation 1. [Oct 22, 2021](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12179&Mode=0) - A revised regulatory framework for NBFCs ([Annex](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12179&Mode=0#AN1)) was announced. In this new framework, NBFCs shall comprise of four layers based on their size, activity, and perceived riskiness. 2. NBFCs in the lowest layer shall be known as NBFC - Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively. The Top Layer is ideally expected to be empty and will be known as NBFC - Top Layer (NBFC-TL). ## Related Notes 1. [NBFCs](NBFCs.md) 2. [NBFCs - Master Directions](NBFCs%20-%20Master%20Directions.md) 3. [NBFCs - Credit Facilties](NBFCs%20-%20Credit%20Facilties.md) 4. [Department of Regulation (DoR)](Department%20of%20Regulation%20(DoR).md) On LinkedIn - https://lnkd.in/p/d5_4d6bD