RBI Strengthens NBFC Concentration Risk Framework

Two Amendments in 2026 Reshape Lending & Capital Norms

– Have you complied yet?

April 1, 2026 – the date that the RBI set as the implementation date for a raft of amendments to the NBFC prudential and concentration risk management framework. Have you complied with them yet? Here are the A2i Legal insights for the compliance of the same.
At A2i Legal, we believe that regulatory compliance is foundation on which sound financial institutions are built. And this quarter, the RBI has given NBFCs something specific and substantive to act on: two interconnected amendments that reshape how your capital is measured, how your profits are counted, and how your lending limits are calculated.

BACKGROUND: THE 2025 MASTER DIRECTIONS

In a sweeping regulatory overhaul of its Non-Banking Financial Companies (NBFC) oversight framework, the Reserve Bank of India (RBI) issued the RBI (Non-Banking Financial Companies -Concentration Risk Management) Directions, 2025, effective November 28, 2025. This comprehensive Master Direction issued under Chapter III-B of the Reserve Bank of India Act, 1934- consolidated and replaced a broad range of legacy circulars, guidelines, and instructions governing NBFC lending and investment concentration.

The Directions adopted a proportionate, risk-based approach, tiering compliance obligations across three NBFC layers: Base Layer (NBFC-BL), Middle Layer (NBFC-ML), and Upper Layer (NBFC-UL). 

Key features of the 2025 Directions include:

1. Board-approved concentration risk policies covering single-party and group exposure limits for all applicable NBFCs.
2. Single-party exposure capped at 25% of Tier 1 Capital for NBFC-ML, with group exposure ceiling at 40%.
3. Enhanced limits of 30% (single) and 50% (group) for NBFC-IFC to support infrastructure financing needs.
4. Sensitive Sector Exposure (SSE) internal limits mandatory for capital markets and commercial real estate.
5. Permissibility of credit risk transfer instruments – government guarantees, CGTMSE, NCGTC, credit default swaps – to offset exposures.

The 2025 Directions also introduced the Large Exposure Framework (LEF) for NBFC-UL, requiring detailed policies on connected-counterparty identification and sector-specific limits. This foundational framework set the stage for targeted amendments in 2026.

FIRST AMENDMENT (JANUARY 2026)

RBI (Non-Banking Financial Companies – Concentration Risk Management) Amendment Directions, 2026 dated January 05, 2026: HIGH-QUALITY INFRASTRUCTURE PROJECTS

The Reserve Bank of India issued the RBI (Non-Banking Financial Companies – Concentration Risk Management) Amendment Directions, 2026 in January 2026, introducing a pivotal new classification that could meaningfully ease concentration norms for NBFCs actively financing infrastructure. The amendment inserts a new proviso to paragraph 4(4) of the 2025 Directions, defining the criteria for “high-quality infrastructure projects” – a designation that allows for differentiated treatment of qualifying infrastructure exposures.

Criteria for Classification as High-Quality Infrastructure

Infrastructure lending shall be classified as lending to high-quality infrastructure projects only if all of the following conditions are cumulatively satisfied:

1. The project has completed at least one year of commercial operations after the date of commencement of commercial operations (DCCO), without any breach of material covenants.
2. The exposure is classified as a standard asset under the NBFC’s asset classification norms.
3. Project revenues arise exclusively from concession or contractual rights granted by the Central Government, a State Government, public sector entities, or statutory/regulatory bodies, and such protection is in place throughout the concession period.
4. The contractual framework provides strong lender protection, including escrow or Trust and Retention Account (TRA) mechanisms to ring-fence project cash flows.
5. Adequate termination risk mitigation provisions are embedded in contracts to protect lenders in the event of early project termination.
6. The borrower is restricted from taking any actions that could jeopardise the interests of lenders – including restrictions on asset disposal, additional encumbrances, or unapproved changes in project scope.
7. The borrower has sufficient arrangements – both internal and external – to meet current and future funding and working capital requirements, as evaluated by the lender based on project structure and cash-flow profile.

Significance for NBFC-IFC and Infrastructure Lenders

This amendment is particularly consequential for Infrastructure Finance Companies (NBFC-IFC) and other NBFCs with large infrastructure portfolios. By formally recognising “high-quality infrastructure projects” as a distinct category, the RBI signals that well-structured, government-backed infrastructure loans carrying robust lender protections merit differentiated concentration risk treatment. Qualifying exposures can potentially benefit from higher single-borrower and group-level exposure allowances, reducing the regulatory cost of concentrated infrastructure lending where risk is genuinely mitigated by contractual safeguards.

The amendment reflects a broader policy intent: to channel NBFC capital towards India’s infrastructure development agenda without compromising financial system stability. 

SECOND AMENDMENT (MARCH 2026)

Reserve Bank of India (Non-Banking Financial Companies – Concentration Risk Management) Second Amendment Directions, 2026 dated March 10, 2026 AND THE COMPANION DIRECTION – Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Second Amendment Directions, 2026 dated March 10, 2026: DEFINITIONS & AUDITOR CERTIFICATION REQUIREMENT

The RBI received multiple representations from NBFCs and industry stakeholders seeking clarity on two interrelated issues: whether current-year interim profits could be included in the Owned Fund computation for capital adequacy, and how Tier 1 capital should be determined for computing maximum permissible exposures under the Concentration Risk Management Directions. Specifically, existing provisions allowed only NBFC-UL entities to reckon current-year profits creating an inequity for other NBFC categories. In response, the RBI issued on March 10, 2026, two simultaneous instruments – the Capital Adequacy Second Amendment and the CRM Second Amendment, reflecting that both directions needed to move in lockstep.

Applicable on NBFC-D, NBFC-ICC, NBFC-Factor, NBFC-MFI, NBFC-IFC, IDF-NBFC.

Key Changes Introduced

1. Alignment of ‘Owned Fund’ and ‘Tier 1 Capital’ Definitions (Cross reference of definition between both directions)

Paragraphs 4(7) and 4(8) of the CRM Directions are replaced to align definitions with the Capital Adequacy Directions:

This alignment eliminates the risk of divergent interpretations between the two frameworks. Before this amendment, the CRM Directions carried their own definitions, which could theoretically yield a different.

‘Owned Fund’ means aggregate of:

1. paid up equity capital;
2. preference shares which are compulsorily convertible into equity;
3. free reserves, including quarterly profits,
   
   Inclusion of quarterly profits shall be subject to the following conditions:
   1. The financial statements shall be subjected to limited review / audit on a quarterly basis by the statutory auditors.
   2. Such profits shall be reduced by average dividend paid in the last three years and the amount which can be reckoned for inclusion would be arrived at as under:
      
      EPₜ = NPₜ – 0.25 × D × t
      
      Where:
      EPₜ = Eligible profit up to quarter “t” of the current financial year (t varies from 1 to 4);
      NPₜ = Net profit up to quarter “t”.
      D = Average dividend paid for or pertaining to the last three financial years.
      Losses in the current year shall be fully deducted from Owned Fund
4. balance in share premium account; and
5. capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset

6. accumulated loss balance;


7. book value of intangible assets; and


8. deferred revenue expenditure, if any.

2.  Mandatory External Auditor’s Certificate Post Capital Augmentation

The amended definition of Tier 1 Capital in the CRM Directions contains a critical proviso that goes beyond mere definitional alignment:

This means that even if an NBFC has completed a capital raise -say, through fresh equity issuance or infusion – it cannot immediately use the expanded capital base to increase its lending limits under concentration norms. The three-step sequence must be completed in order:

• Step 1: Complete the capital augmentation – funds must be actually received and the process concluded.
• Step 2: Obtain an external auditors’ certificate confirming that the augmentation has been completed and validating the quantum of capital added.
• Step 3: Submit the certificate to RBIs Department of Supervision (DoS) – only after this submission shall the NBFC reckon the additional capital when computing concentration limits.

This is a deliberate friction mechanism. It prevents NBFCs from front-running capital additions – for instance, declaring a rights issue and immediately expanding their exposure book before the capital is actually received and auditor-verified.

COMPLIANCE OUTLOOK & ACTION POINTS

NBFCs across all layers should assess the impact of these amendments on their capital and exposure calculations and update internal policies accordingly. 

Key action points:

• Engage statutory auditors to establish a quarterly limited review calendar without timely limited reviews, the quarterly profit inclusion benefit cannot be availed for either capital adequacy or concentration limit computations.
• Finance and treasury teams should recompute Owned Fund and Tier 1 Capital as at the most recent quarter using the EPₜ formula, and assess the revised headroom available under concentration norms.
•  Establish a formal capital augmentation protocol: any equity infusion or capital raise must be followed immediately by:
  • external auditor certification and 
  • submission to RBI DoS before the capital is reflected in concentration limit workings.

• Update the Board-approved concentration risk policy to incorporate the revised definitions of Owned Fund and Tier 1 Capital and the auditor certification step- both of which now form mandatory procedural requirements.
• Review current-year losses carefully- any losses must be fully and immediately deducted from Owned Fund with no possibility of averaging, impacting both CRAR and concentration headroom.
• Monitor for further RBI clarification on the divergence in treatment of fresh equity infusion between capital adequacy and concentration norm computations- an area that may require supplementary guidance.

THE BOTTOM LINE:

RBI is tightening controls on how NBFCs count their capital and concentrate their lending- but is also offering a meaningful carve-out for well-structured infrastructure deals.

In plain terms:

• If you lend to infrastructure, you can now access higher exposure limits but only if the project has a clean one-year operating track record, government-backed revenues, and watertight lender protections (escrow, pari-passu charge, no borrower side-deals). Sloppy infrastructure lending gets no benefit.
• If you raise new capital, you can’t immediately use it to expand your lending book. You must first get your external auditor to certify it and inform RBI’s Department of Supervision. No shortcuts.
• How you define your capital base for concentration limits must now exactly match your Capital Adequacy framework- no more picking a favourable number from a different set of rules.

The message from RBI is clear
Grow your infrastructure book if you want, but prove the quality rigorously; and don’t game your capital figures to show more lending headroom than you actually have.