RBI’s NBFC Branch Reform Boosts Inclusion, but Tests Risk Discipline

It is relevant to discuss how RBI regulations for Non-Bank Financial Companies have evolved in recent years, and to identify measures aimed at mainstreaming them and expanding their role in the financial sector. Pursuing financial inclusion is possible only when all intermediaries work in tandem.

The financial inclusion policy remains a globally proven framework for alleviating poverty and harnessing the economy’s full potential. Strengthening society’s connectivity to the formal financial system can accelerate growth as entrepreneurship expands.

In addition to banks, NBFCs serve as the last-mile delivery mechanism in the financial system. Their role is pivotal because they operate in credit segments and geographies where traditional banks often struggle to maintain a physical presence or assess risk.

Among NBFCs, microfinance institutions are the backbone of rural inclusion, supporting livelihoods in the hinterland and expanding networks of micro rural enterprises. The role of NBFCs is therefore adequately factored into RBI’s computation of the financial inclusion index. It coordinates with other sectoral regulators, including SEBI, IRDAI and PFRDA, to ensure it captures the full spectrum of the formal financial sector in its assessment.

RBI’s inclusion of non-banks in computing the financial inclusion index affirms their growing strategic and coordinated role with banks in strengthening financial intermediation and providing credit to productive sectors of the economy.

As a result of the steady role of banks and non-banks, RBI’s FI Index reached 67.0 in March 2025, up from 53.9 in March 2021 and from a base of 43.4 in March 2017. Notably, part of this growth is attributed to the expansion of digital lending by NBFCs and fintechs, as well as the implementation of the National Strategy for Financial Inclusion 2025-30.

Regulatory Framework
To reduce regulatory arbitrage and bring NBFCs into the mainstream financial sector, RBI introduced the Scale-Based Regulation framework for NBFCs in October 2021. The framework moved away from a one-size-fits-all approach, aligning the intensity of regulation with each entity’s systemic importance and risk profile.

The SBR framework categorises NBFCs into four layers based on size, activity and perceived risk. The Top Layer covers NBFCs perceived by RBI as posing extreme systemic risk. The Upper Layer includes the top NBFCs by asset size and warrants enhanced regulation based on a risk-assessment methodology. The Middle Layer covers all deposit-taking entities and those with assets of ₹10 billion or more. The Base Layer covers non-deposit-taking NBFCs below ₹10 billion, including P2P platforms, account aggregators and those without public funds or customer interface.

As of March 2025, the Top Layer remains empty. The Upper Layer has 15 NBFCs, raised from the earlier top 10 due to growth in asset size. The Middle Layer has about 400 entities, while the remaining 8,500-plus fall in the Base Layer.

After strengthening the regulatory framework, RBI introduced measures to leverage synergies between banks and non-banks to improve risk sharing and outreach. It permitted a co-origination model in 2018, allowing banks to partner with systemically important NBFCs for priority sector lending.

In November 2020, RBI introduced a twin-layered Co-lending Model, broadening participation to all registered NBFCs, including housing finance companies. In January 2026, RBI harmonised the framework and removed the distinction between priority and non-priority sector loans, leaving regulated entities to assess risk and determine exposure.

Branch Expansion
In a strategic move, NBFCs are now permitted to open branches without RBI permission and expand business outreach to better serve customers. The objective is to facilitate ease of doing business while ensuring regulatory compliance.

Such operational flexibility in branch expansion can increase touchpoints, deepen competition and create greater product and pricing diversity.

There is precedent. In July 2013, banks were permitted to open branches without prior RBI approval. That shifted policy from prior approvals to discretionary branch expansion. The present move affirms that while RBI has increased the rigour of regulatory oversight for NBFCs, it is also seeking to reduce regulatory arbitrage between banks and non-banks, bringing them closer on critical parameters.

The number of physical bank branches stood at close to 164,000 in March 2025. Though digital footprints have expanded and public sector bank consolidation slowed branch growth for a period, expansion is now reviving. While secondary data is not fully verifiable, NBFCs had around 32,000 branches by March 2025.

Their asset size stands at ₹312 trillion crore for banks, or 83%, against ₹50 trillion for non-banks, or 17%. This underscores both the scale differential and the opportunity for expansion.

Risk Management
While NBFCs can welcome the operational freedom to expand, they need to remain mindful of near and long-term risk implications. They should review or adopt a branch expansion policy with firm viability parameters and clear timelines to breakeven.

Any new branch begins as a cost centre. Projected business parameters must be closely monitored to ensure long-term viability and a transition into a profit centre.

Any over-enthusiasm in expanding branch networks can elevate operational and credit risks and may prove counterproductive over time.

This calls for strengthening integrated risk management frameworks, upgrading technology, developing repositories of skill, reviewing credit and recovery policies, revisiting outsourcing policies, and centralising business processing where branch density rises within the same city.

A significant amount of preparatory work, including policy shifts and revisions to standard operating procedures, should begin before operational freedom is exercised. Risk management systems must be aligned to cope with increased business and operational risks.

Yet, from the perspective of ease of doing business, greater competition, diversified products, sharper pricing and the scale of underserved segments, this remains a positive policy move.

It creates the vibrancy needed to turbocharge the financial intermediation ecosystem. But whether it delivers on that promise will depend not merely on branch expansion, but on how prudently NBFCs balance growth with risk discipline.