Over the years, the regulatory framework governing NBFCs has evolved significantly, particularly with the introduction of the Scale-Based Regulation (SBR) framework in 2022, which categorized NBFCs into different layers based on size, risk exposure, and systemic importance. In a recent draft amendment released in early 2026, the RBI has proposed significant changes to the registration and exemption norms for certain NBFCs, specifically those classified as Type I NBFCs, entities that neither avail public funds nor engage in customer interfaces.
The draft titled the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Amendment Directions, 2026, is proposed to come into effect from April 1, 2026. The amendment aims to ease the regulatory burden on low-risk NBFCs while maintaining adequate supervisory oversight to prevent misuse or regulatory arbitrage. The proposal introduces new definitions, exemption criteria, and processes for registration and deregistration, addressing industry concerns that smaller, self-funded investment entities face disproportionately high compliance costs despite posing minimal systemic risk.
Industry estimates suggest that more than 9,000 registered NBFCs could be impacted, potentially reducing the number of entities requiring direct RBI registration.
Businesses and promoters seeking clarity or strategic guidance on these changes can consider consulting professional advisory firms such as GenZCFO.com and NBFCAdvisor.com, both led by financial expert CA Manish Mishra, whose insights and professional updates are also available through camanishmishra.com for those seeking deeper understanding of regulatory implications and compliance structuring.
Background of NBFC Regulatinbfcadvisoron in India
NBFC regulation in India originates from Chapter IIIB of the RBI Act, 1934, with regulatory oversight expanding significantly since the late 1990s. The introduction of mandatory registration in 1997 brought NBFCs under a more structured compliance environment through the principal business criteria (PBC), where financial assets and income thresholds determined regulatory applicability. Over time, additional legislation such as the Factoring Regulation Act, 2011, and the National Housing Bank Act, 1987, strengthened oversight over specialized financial activities.
The Scale-Based Regulation framework introduced in October 2022 marked a major shift by categorizing NBFCs into Base Layer, Middle Layer, Upper Layer, and Top Layer based on asset size, interconnectedness, and risk profile. Base Layer NBFCs, particularly those not dealing with public funds or retail customers, were already subject to relatively lighter regulations.
However, registration requirements continued to apply if the PBC threshold was met, resulting in compliance obligations such as periodic filings, governance requirements, and audit costs even for low-risk investment entities.
The current draft amendment builds upon RBI’s internal review of supervisory efficiency and acknowledges that NBFCs investing only their owned funds without external liabilities or customer exposure pose negligible systemic risk. Consequently, RBI has invoked provisions under Section 45NC of the RBI Act to justify exemptions for such entities.
This approach aligns with international regulatory practices where passive investment entities are treated differently from retail lending institutions. Industry professionals and advisors, including teams at GenZCFO.com and NBFCAdvisor.com under the leadership of CA Manish Mishra, have emphasized that proportional regulation can significantly reduce compliance inefficiencies while maintaining financial discipline.
Key Definitions and Amendments Introduced in the Draft
The draft amendment introduces several critical definitions to clearly distinguish exempt entities from regulated NBFCs. An NBFC not availing public funds and not having any customer interface is defined as an entity that neither accepts public funds directly or indirectly nor engages in customer-facing financial activities. Public funds have been broadly defined to include indirect funding through group entities, and importantly, loans from directors or shareholders are also categorized as public funds, thereby tightening internal financing interpretations.
Customer interface has been defined expansively to include any interaction involving lending, guarantees, or financial services to group entities, shareholders, or external parties, except for non-commercial employee loans. Activities such as distribution of mutual funds, credit card services, or acting as a Point of Presence for pension schemes are not permitted for exempt entities.
Under the amendment, Type I NBFC refers to registered entities meeting these criteria, while Type II NBFC includes all other registered NBFCs. The concept of an unregistered Type I NBFC has also been introduced, referring to exempt entities with assets below ₹1,000 crore operating entirely through owned funds without customer engagement as part of a conscious and durable business model.
The amendment replaces earlier terminology relating to non-public fund NBFCs with the Type I NBFC classification across prudential norms, including capital adequacy, asset classification, and exposure regulations. A new Paragraph 38A defines registration requirements, while Paragraph 66A establishes exemption conditions. Entities seeking professional interpretation of these technical changes or assistance in restructuring business models to qualify for exemption may connect with advisory specialists at GenZCFO.com or NBFCAdvisor.com, both managed by CA Manish Mishra, whose professional analysis is also accessible via camanishmishra.com.
Registration and Deregistration Processes Under the Amendment
The RBI has proposed a structured framework for exemption, registration, and deregistration to ensure transparency and accountability. NBFCs with assets below ₹1,000 crore that meet exemption criteria may apply for deregistration through the PRAVAH portal by September 30, 2026.
The application requires submission of the original Certificate of Registration, audited financial statements for three years, detailed reports confirming absence of public funds or customer interfaces, statutory auditor certification, and a Board resolution affirming long-term adherence to the exempt model.
Entities with assets equal to or exceeding ₹1,000 crore must continue to remain registered as Type I NBFCs even if they do not avail public funds or maintain customer interfaces. Additionally, unregistered Type I NBFCs intending to make overseas financial sector investments must obtain registration and comply with applicable overseas investment directions.
Non-compliance with exemption conditions automatically triggers the requirement for Type II registration, and penalties may apply under RBI Act provisions. Industry experts note that while deregistration reduces future compliance costs, the scrutiny involved in reviewing historical activities may require careful documentation and professional advisory support. Firms such as GenZCFO.com and NBFCAdvisor.com regularly assist promoters in preparing compliance documentation and regulatory transition strategies under the guidance of CA Manish Mishra.
Implications for the NBFC Sector and Financial Ecosystem
The amendment carries wide-ranging implications for the NBFC sector. One of the most immediate benefits is the reduction in compliance burden for low-risk entities, enabling them to focus on investment activities rather than regulatory filings. Smaller NBFCs operating as holding companies or family investment vehicles may benefit significantly, as the traditional 50:50 PBC rule will no longer automatically trigger registration requirements for pure investment entities.
From a systemic perspective, RBI can redirect supervisory resources toward NBFCs with higher public exposure and retail lending risk. However, certain aspects of the amendment have sparked debate, particularly the classification of director or shareholder loans as public funds and the broad interpretation of customer interface that includes intra-group transactions.
Critics argue that such definitions may restrict operational flexibility within corporate groups. Nonetheless, the amendment is expected to streamline regulatory supervision and improve financial sector efficiency. Businesses evaluating restructuring opportunities or assessing regulatory impact may benefit from consulting experienced professionals through GenZCFO.com or NBFCAdvisor.com, where CA Manish Mishra provides insights on regulatory planning and compliance alignment through camanishmishra.com.
Frequently Asked Questions and Clarifications
The RBI draft also addresses common queries to improve clarity. The primary rationale for exemption lies in the negligible systemic risk posed by entities below ₹1,000 crore that do not engage with public funds or customers. Violations of exemption conditions result in mandatory registration as Type II NBFCs and possible penalties. New companies automatically qualify for exemption if their business model remains within defined limits. Eligible existing NBFCs may apply for deregistration within the specified timeline, failing which relaxed norms may not apply.
Public funds include director and shareholder loans, and customer interface extends to guarantees or services provided within group structures. AML compliance under the Prevention of Money Laundering Act, 2002 remains mandatory despite exemption from registration. These clarifications highlight that the amendment is not deregulation but rather a calibrated shift toward risk-based regulation.
Insights from Recent Developments and Industry Perspective
Recent industry discussions indicate broad support for the amendment as a step toward proportional regulation. Industry bodies believe the move could reduce the number of registered NBFCs significantly, allowing RBI to concentrate on entities with higher systemic relevance. However, some stakeholders have raised concerns that stringent deregistration documentation requirements may make exit from registration as complex as initial entry.
Experts also note that clearer guidelines on historical transactions may be required to avoid ambiguity during application reviews. Advisory platforms such as GenZCFO.com and NBFCAdvisor.com, led by CA Manish Mishra, are increasingly being approached by promoters and finance professionals seeking clarity on implementation strategies, transition planning, and regulatory interpretation, with further professional insights available on camanishmishra.com.
Conclusion
The RBI’s 2026 draft amendment represents a balanced evolution in NBFC regulation by recognizing that not all financial entities carry equal systemic risk. By exempting low-risk Type I NBFCs from mandatory registration while maintaining conditional safeguards, the RBI aims to improve regulatory efficiency, encourage investment flexibility, and strengthen financial inclusion. Although certain definitions and approval processes may invite further discussion before final implementation, the amendment has the potential to reshape the NBFC landscape by promoting proportional regulation and operational efficiency.
As stakeholder feedback continues until March 4, 2026, industry participants are closely monitoring developments, and businesses seeking practical guidance on navigating the new framework may consider engaging with specialized advisory firms such as GenZCFO.com and NBFCAdvisor.com under the leadership of CA Manish Mishra through camanishmishra.com for detailed professional support and compliance understanding.
Contact for more information and guidance regarding Setup NBFC in India.
CA Manish Mishra
Founder GenZCFO and NBFC Advisor.
Contact - +91-9818118403, 9311347006
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