Transition of an NBFC from Base Layer to Mid Layer

The transition of NBFC from Base Layer to Mid Layer is an important regulatory milestone for a growing Non-Banking Financial Company. As an NBFC expands its loan book, investments, operations and overall asset base, it may move beyond the regulatory limits applicable to the Base Layer. For a non-deposit-taking NBFC, reaching an asset size of ₹1,000 crore or more generally brings it within the Middle Layer under the Reserve Bank of India's Scale Based Regulation framework, subject to the applicable activity and group-level classification rules. For a growing financial business in cities such as Noida, Delhi, Mumbai, Bengaluru and other major financial centres, understanding this transition early can make the change much easier to manage.

The transition of an NBFC from Base Layer to Mid Layer is not merely a change in terminology. It brings a higher level of regulatory oversight and requires the NBFC to strengthen areas such as capital adequacy, risk management, governance, compliance, internal controls, exposure management and reporting. RBI's current framework provides for four layers—Base, Middle, Upper and Top—with regulations becoming progressively stronger as the NBFC moves upward.

For an NBFC approaching the ₹1,000 crore threshold, preparation should ideally begin before the threshold is crossed. Waiting until the asset size has already increased can leave the company with limited time to strengthen policies, systems, committees and reporting mechanisms.

What is the Transition of NBFC from Base Layer to Mid Layer?

The transition of NBFC from Base Layer to Mid Layer takes place when an NBFC becomes subject to Middle Layer classification under the Scale Based Regulation framework.

1.    Under the current RBI framework, the Base Layer broadly includes non-deposit-taking NBFCs having an asset size below ₹1,000 crore, along with certain categories that remain in the Base Layer because of their nature of business. The Middle Layer includes all deposit-taking NBFCs irrespective of asset size, non-deposit-taking NBFCs with an asset size of ₹1,000 crore and above, and specified categories such as CICs, HFCs, IFCs, IDF-NBFCs and SPDs.

2.    Therefore, a conventional non-deposit-taking NBFC that has been operating below the threshold may have to move into the Middle Layer when its asset size reaches ₹1,000 crore.

3.    RBI has specifically clarified that once an NBFC reaches the ₹1,000 crore asset-size threshold, it becomes subject to the applicable Middle Layer regulatory requirements even if its previous audited balance sheet did not show assets of ₹1,000 crore or more. The directions applicable to Middle Layer NBFCs are required to be followed from the point at which the threshold is attained.

4.    This makes the transition of NBFC from Base Layer to Mid Layer a compliance event that should be monitored continuously rather than only at the end of the financial year.

Why Does an NBFC Move from Base Layer to Middle Layer?

The Scale Based Regulation framework follows the principle that larger and potentially more complex financial institutions require stronger regulatory controls. A small NBFC generally has a smaller balance sheet and comparatively limited systemic impact. As its asset base grows, however, its lending exposure, borrowing, customer base and interconnectedness may increase. Consequently, RBI applies additional requirements to NBFCs operating in the Middle Layer.

The key trigger for many non-deposit-taking NBFCs is the ₹1,000 crore asset-size threshold.

However, asset size is not the only consideration. The nature of the NBFC's activities and its group structure can also influence classification. For example, certain NBFCs are placed in the Middle Layer based on their activity irrespective of whether their asset size is below ₹1,000 crore. The current framework includes deposit-taking NBFCs, Standalone Primary Dealers, Infrastructure Debt Fund-NBFCs, Core Investment Companies, Housing Finance Companies and Infrastructure Finance Companies within the Middle Layer framework.

₹1,000 Crore Threshold for Middle Layer Classification

The ₹1,000 crore threshold is one of the most important points to understand when planning the transition of NBFC from Base Layer to Mid Layer.

A non-deposit-taking NBFC that reaches an asset size of ₹1,000 crore or above is required to comply with the regulations applicable to Middle Layer NBFCs. RBI's 2025 framework expressly states that the company becomes subject to the applicable requirements when it attains that asset size, even if its previous balance sheet did not reflect the same level of assets.

Simple Illustration

Suppose an NBFC has the following asset position:

The company should not assume that it can continue following only its previous Base Layer compliance framework after crossing the threshold. This is why an NBFC should monitor its asset size regularly and create a transition plan before approaching ₹1,000 crore.

Is the Transition of NBFC from Base Layer to Mid Layer Automatic?

For a qualifying NBFC, the classification is driven by the RBI's Scale Based Regulation framework rather than being a conventional fresh NBFC registration. This distinction is important.

An NBFC does not normally establish a completely new company merely because its asset size has crossed ₹1,000 crore. Instead, the existing NBFC becomes subject to the regulatory requirements associated with the Middle Layer. RBI's directions state that once the NBFC reaches the prescribed asset size, the Middle Layer regulations apply from the point at which the threshold is attained. However, the practical transition still requires considerable compliance work. The company must review its existing systems and determine whether its governance, capital, risk management, compliance and internal controls are capable of meeting Middle Layer requirements. Therefore, while the regulatory classification may arise from the company's size and activity, preparation for the transition of NBFC from Base Layer to Mid Layer requires active management action.

Group-Level Asset Calculation for Middle Layer Classification

One of the most important areas that NBFCs sometimes overlook is group-level classification. Where multiple NBFCs form part of a common group or are floated by a common set of promoters, they are not always assessed independently for Middle Layer classification. RBI requires the total assets of the relevant NBFCs in the group to be considered for determining the threshold. Under the current framework, where the consolidated asset size of the relevant NBFCs in the group reaches ₹1,000 crore or more, each qualifying NBFC-ICC, NBFC-MFI, NBFC-Factor and MGC in that group can fall within the Middle Layer. This means that an NBFC should not look only at its individual balance sheet when assessing the possibility of the transition of NBFC from Base Layer to Mid Layer.

Example

Consider a group having:

• NBFC-ICC – ₹600 crore

• NBFC-MFI – ₹300 crore

• Another qualifying NBFC – ₹150 crore

The combined relevant asset base may exceed ₹1,000 crore. In such a case, group-level classification requirements need to be examined rather than looking at each company independently. RBI also requires statutory auditors to certify the asset size of NBFCs in the group as on March 31 and the certificate is to be furnished to the concerned RBI supervisory department.

What Changes After the Transition?

The transition of an NBFC from Base Layer to Mid Layer brings a wider compliance framework. The most important changes generally relate to:

• Capital adequacy

• Risk management

• Corporate governance

• Compliance function

• Board committees

• Chief Risk Officer requirements

• Chief Compliance Officer requirements

• Exposure and concentration limits

• Internal controls

• Reporting and regulatory supervision

• Board-approved policies

The exact requirements depend on the type of NBFC, its activities and the provisions applicable to it.

A company should therefore conduct a detailed regulatory gap analysis rather than simply changing its internal classification from NBFC-BL to NBFC-ML.

Capital Adequacy Requirements for Middle Layer NBFCs

Capital adequacy is one of the most important areas during the transition of NBFC from Base Layer to Mid Layer.

Under the RBI's 2025 Prudential Norms on Capital Adequacy Directions, an NBFC in the Middle Layer and above is required to maintain a minimum Tier 1 capital of 10% of aggregate risk-weighted assets and a minimum CRAR of 15%. Tier 2 capital cannot exceed 100% of Tier 1 capital. This makes capital planning particularly important for a growing NBFC.

Before reaching the threshold, the company should assess:

1. Current Tier 1 capital.

2. Risk-weighted assets.

3. Existing borrowings.

4. Expected loan-book growth.

5. Capital requirements for future expansion.

6. Potential impact of asset-quality deterioration.

A sudden increase in the loan portfolio without adequate capital planning can create pressure on the company's regulatory ratios.

Governance Requirements After Moving to the Middle Layer

Governance becomes more structured after the transition of NBFC from Base Layer to Mid Layer. The RBI's 2025 Governance Directions provide separate requirements for Middle Layer and Upper Layer NBFCs. Middle Layer NBFCs are subject to the relevant provisions concerning Board composition, committees, risk management, compliance, key managerial personnel, independent directors and other governance matters. The company should therefore review its Board structure and governance framework before the transition becomes effective.

Important areas include:

• Fit-and-proper assessment of directors.

• Board-approved policies.

• Risk Management Committee.

• Audit Committee requirements.

• Nomination and remuneration-related governance.

• Compliance function.

• Chief Risk Officer requirements where applicable.

• Chief Compliance Officer.

• Independent director requirements where applicable.

Chief Compliance Officer for Middle Layer NBFCs

The compliance function becomes significantly more important after the transition of an NBFC from Base Layer to Mid Layer. RBI's framework requires Middle Layer and Upper Layer NBFCs to maintain an independent compliance function and appoint a Chief Compliance Officer in accordance with the prescribed framework. The earlier RBI circular required Middle Layer NBFCs to put the compliance framework in place by October 1, 2023. The compliance function should not be treated as a paperwork exercise.

It should help the NBFC:

• Track regulatory changes.

• Monitor compliance obligations.

• Identify compliance gaps.

• Conduct compliance testing.

• Escalate significant issues.

• Maintain regulatory records.

• Support Board-level compliance reporting.

Risk Management After the Transition

Risk management is another major area affected by the transition of NBFC from Base Layer to Mid Layer. As the balance sheet grows, the company may face greater credit, liquidity, market, operational, concentration and compliance risks. A Middle Layer NBFC should have a structured approach for identifying and controlling these risks.

Key risk areas include:

Concentration Norms for Middle Layer NBFCs

The transition of an NBFC from Base Layer to Mid Layer also requires careful review of exposure and concentration limits.

Under the 2025 concentration risk framework, an NBFC other than an NBFC-IFC generally cannot have credit and investment exposure exceeding 25% of its Tier 1 capital to a single party and 40% of Tier 1 capital to a single group of parties, subject to the applicable provisions and permitted infrastructure-related additional exposure. This makes it necessary for an NBFC to review its existing portfolio before and after moving into the Middle Layer. A portfolio that was manageable under the company's previous scale may require restructuring or closer monitoring after capital and exposure requirements are applied.

Board-Approved Policies

One of the practical tasks involved in the transition of NBFC from Base Layer to Mid Layer is reviewing the company's policy framework. Middle Layer NBFCs are required to maintain appropriate Board-approved policies under the applicable governance framework. The 2025 Governance Directions specifically refer to areas such as fit-and-proper status of directors, the role of the Chief Compliance Officer, compensation policy and specified Board reviews. Policies should be practical and actually followed by management.

Important policies may include:

• Risk Management Policy

• Compliance Policy

• Credit Policy

• Investment Policy

• Asset Liability Management Policy

• Related Party Transaction Policy

• Fair Practices Code

• Grievance Redressal Policy

• Internal Control Policy

• Outsourcing Policy

• Fraud Risk Management Policy

Technology and Internal Systems

The transition of an NBFC from Base Layer to Mid Layer is also a good time to review technology infrastructure. A larger NBFC generally handles more customers, transactions, loan accounts, regulatory reports and internal controls. Manual processes that worked at a smaller scale can become unreliable as operations grow.

The company should assess:

• Loan management systems.

• Accounting systems.

• Regulatory reporting systems.

• Customer complaint tracking.

• KYC and AML monitoring.

• Data security.

• Access controls.

• Audit trails.

• Backup and disaster recovery.

• MIS reporting.

RBI has also prescribed Core Financial Services Solution requirements for applicable Middle Layer and Upper Layer NBFCs having 10 or more fixed-point service delivery units under the relevant framework.

Compliance Reporting After Transition

A common mistake is to treat the transition of NBFC from Base Layer to Mid Layer as a one-time event. In reality, Middle Layer classification means that the company needs an ongoing compliance system.

The NBFC should maintain a compliance calendar covering:

• RBI returns.

• Capital adequacy reporting.

• Financial statements.

• Asset classification.

• Provisioning.

• Exposure monitoring.

• Governance reporting.

• Board meetings.

• Risk committee meetings.

• Audit requirements.

• Statutory filings.

• Customer protection requirements.

Practical Process for the Transition

The transition of NBFC from Base Layer to Mid Layer can be managed through a structured process.

Step 1: Determine Current Classification

First, identify the existing NBFC category and confirm whether it currently falls within the Base Layer.

Step 2: Calculate Asset Size

Review the company's total assets and determine whether the ₹1,000 crore threshold has been reached.

Step 3: Check Group Exposure

If the company belongs to a group containing other NBFCs, assess whether group-level asset aggregation affects classification.

Step 4: Identify the Transition Date

Determine when the NBFC actually reaches the applicable threshold and the regulatory requirements that consequently become applicable.

Step 5: Conduct a Compliance Gap Analysis

Compare existing compliance practices with Middle Layer requirements.

Step 6: Strengthen Governance

Review Board structure, committees, policies and senior management responsibilities.

Step 7: Review Capital Position

Calculate Tier 1 capital, CRAR and risk-weighted assets and identify any capital shortfall.

Step 8: Review Risk and Exposure

Check concentration limits, borrower exposure, group exposure and other applicable prudential requirements.

Step 9: Strengthen Compliance Function

Ensure the compliance function and required personnel are appropriately established.

Step 10: Implement Ongoing Monitoring

Once the transition is complete, continue monitoring asset size, capital, risk and regulatory compliance.

Documents and Information Required for the Transition of NBFC from Base Layer to Mid Layer

For a professional assessment of the transition of NBFC from Base Layer to Mid Layer, the following information may be reviewed:

• Certificate of Registration.

• Latest audited financial statements.

• Current balance sheet.

• Asset-size calculation.

• Details of borrowings.

• Capital adequacy calculations.

• Existing RBI compliance records.

• Board composition.

• Details of directors and senior management.

• Existing Board-approved policies.

• Loan portfolio details.

• Exposure statements.

• Group structure.

• Details of other NBFCs within the group.

• Regulatory returns.

• Internal audit reports.

Common Challenges During the Transition

The transition of an NBFC from Base Layer to Mid Layer can become difficult when the company starts preparing too late.

Some common challenges include:

1. Inadequate Capital Planning

The NBFC may have grown rapidly without considering the higher capital requirements applicable to Middle Layer entities.

2. Weak Governance Structure

Some growing NBFCs continue operating with informal decision-making processes even after their scale has increased substantially.

3. Outdated Policies

Existing policies may not cover the regulatory expectations applicable to a Middle Layer NBFC.

4. Lack of Compliance Personnel

The company may not have a sufficiently independent compliance function.

5. Poor Exposure Monitoring

Rapid lending growth can result in concentration issues if borrower and group exposures are not monitored regularly.

6. Manual Reporting

Heavy reliance on spreadsheets and manual records can increase the possibility of errors.

7. Group-Level Classification Issues

Companies sometimes consider only their own balance sheet and overlook the impact of other NBFCs within the group.

How to Prepare Before Reaching ₹1,000 Crore?

The best approach to the transition of an NBFC from Base Layer to Mid Layer is preparation before the threshold is reached. An NBFC with assets of ₹850–₹900 crore should ideally begin reviewing Middle Layer requirements rather than waiting until the balance sheet crosses ₹1,000 crore.

A simple preparation plan can include:

This approach reduces last-minute compliance pressure.

Difference Between Base Layer and Middle Layer

Understanding the difference between the two layers makes the transition of an NBFC from Base Layer to Mid Layer easier to understand.

The table is a simplified comparison. Actual requirements depend on the type of NBFC and the relevant RBI directions.

Benefits of Properly Managing the Transition

The transition of an NBFC from Base Layer to Mid Layer is a regulatory requirement, but proper preparation can also provide business advantages.

A structured transition can help the company:

• Improve corporate governance.

• Strengthen investor confidence.

• Improve risk controls.

• Reduce regulatory surprises.

• Create better financial reporting.

• Improve internal accountability.

• Prepare for future business expansion.

• Identify compliance gaps early.

• Improve Board-level decision-making.

How Can StartRight4U Help With the Transition of an NBFC from Base Layer to Mid Layer?

The transition of an NBFC from Base Layer to Mid Layer requires a detailed understanding of RBI regulations, the NBFC's financial position, its business activity, group structure and existing compliance framework. StartRight4U can assist NBFCs in assessing their regulatory position and preparing for the additional requirements associated with Middle Layer classification.

The support can include:

• Assessment of the applicable NBFC layer.

• Asset-size and classification review.

• Group-level classification assessment.

• Regulatory gap analysis.

• Review of capital adequacy.

• Governance and Board compliance review.

• Policy review and updation.

• Risk management assessment.

• Compliance framework review.

• Regulatory reporting support.

• Documentation assistance.

• Ongoing compliance guidance.

The objective is to help the NBFC move through the transition in an organised manner while reducing the possibility of avoidable compliance gaps.

Key Points NBFCs Should Remember

Before completing the transition of an NBFC from Base Layer to Mid Layer, management should remember the following:

• ₹1,000 crore is a key threshold for relevant non-deposit-taking NBFCs.

• Classification depends on the NBFC's category and activities.

• Certain NBFCs are in the Middle Layer irrespective of asset size.

• Group-level assets can affect classification.

• Crossing the threshold can trigger Middle Layer requirements even if the previous audited balance sheet was below ₹1,000 crore.

• Capital adequacy needs to be reviewed.

• Governance requirements become more extensive.

• Risk management should be strengthened.

• Concentration limits should be monitored.

• Compliance should be treated as an ongoing function.

• Policies should be updated before the company reaches the threshold.

• Temporary fluctuations below ₹1,000 crore do not necessarily mean that Middle Layer requirements immediately disappear; the applicable RBI provisions concerning continuing compliance need to be considered.