The Federation of Indian Asset Financiers Associations’ demand for a separate regulator for small NBFCs is about more than the survival of a group of family-owned lenders. It raises a wider urban economy question: what happens to small businesses, transport operators and first-time borrowers when the formal credit institutions serving them are required to hold substantially more capital, regardless of their size and operating model?
FIAFA has urged the Centre to create a separate regulatory framework for small non-banking financial companies with net worth between Rs 2 crore and Rs 100 crore. It has also sought a freeze on further increases in minimum Net Owned Fund requirements and proposed a high-level committee involving the finance ministry and NITI Aayog to review the impact of regulatory changes on small-ticket credit delivery. The federation said it submitted a memorandum to Union finance minister Nirmala Sitharaman.
The immediate trigger is the phased increase in the minimum NOF threshold. According to the federation, the requirement remained at Rs 25 lakh for decades before rising to Rs 2 crore in March 2017 and Rs 5 crore in March 2025. It is scheduled to increase to Rs 10 crore by March 2027. FIAFA argues that the next increase could be disproportionate for small, non-deposit-taking NBFCs whose operations are concentrated in local and regional markets.
The significance of this argument lies in the role these lenders claim to play between informal finance and the banking system. FIAFA said small NBFCs primarily deploy promoters’ own capital and serve underserved borrowers in semi-urban and rural areas. Their customers include micro, small and medium enterprises, transport operators and first-time borrowers—groups that may not fit easily into the lending systems of larger institutions. The federation’s position is that a uniform capital rule does not adequately reflect differences in scale, risk profile, geographical reach or business model.
That claim should not be read as an argument against financial regulation. The issue is whether the regulatory framework can distinguish between institutions that pose materially different levels of systemic risk while still protecting borrowers and maintaining standards of governance. FIAFA said the Reserve Bank of India’s “one-size-fits-all” approach does not account for the limited systemic footprint of small, non-deposit-taking NBFCs. The supplied report does not establish whether regulators accept that assessment, nor does it provide an independent evaluation of the risk profile of the affected lenders.
The federation’s concern is also rooted in the sector’s previous contraction. It cited the cancellation of around 1,701 NBFC registrations in financial year 2017-18, attributing the cancellations largely to companies’ inability to meet the Rs 2 crore NOF requirement. That figure, as presented in the report, is a central part of FIAFA’s case that higher capital thresholds can remove lenders from the market rather than strengthen their risk management. The report does not establish how many of those cancellations involved active small-ticket lenders, how many companies exited for other reasons, or what happened to their borrowers after cancellation.
Those unanswered questions matter because the effect of a lender’s exit is not limited to the financial sector. Small businesses and transport operators depend on access to working capital and asset finance to purchase vehicles, maintain equipment and manage irregular cash flows. A first-time borrower may also rely on a lender with local knowledge, regional presence or a willingness to process smaller loans. If such institutions disappear, the replacement may be a bank, a larger NBFC or an informal lender—but the supplied evidence does not show which option is most likely in each market.
FIAFA’s proposal therefore introduces a question of institutional design. It wants a dedicated regulator under the finance ministry rather than the current framework applied through the RBI. It also wants a high-level review involving the finance ministry and NITI Aayog. The proposal suggests that the federation sees the problem not only as a capital requirement issue but as a mismatch between national supervision and the operating realities of small, locally focused financial companies.
The regulatory choice has two competing objectives. One is financial stability: lenders must have sufficient capital, sound governance and the ability to absorb losses. The other is credit access: rules should not unintentionally push legitimate small lenders out of markets where formal banking has limited reach. FIAFA’s submission argues that the present trajectory gives greater weight to the first objective without adequately measuring the second. Whether that is correct cannot be determined from the federation’s memorandum alone, but it identifies the policy trade-off clearly.
The scheduled increase to Rs 10 crore by March 2027 gives the debate a defined timeline. For a small NBFC, the difference between Rs 5 crore and Rs 10 crore is not merely an accounting adjustment. It can affect promoter funding, ownership structures, expansion plans and the decision to continue operating. FIAFA said higher thresholds had already prompted significant exits and argued that further tightening could drive more small lenders out of the market. The report does not provide the number of companies that may be affected by the 2027 threshold or the amount of additional capital they would collectively need.
The federation has also rejected the suggestion that small lenders could operate under state money-lending laws. It said restrictive interest-rate caps, which it estimated could be around 9%, would make their business models unviable. FIAFA contrasted those caps with the substantially higher rates at which banks lend to small businesses. This part of the argument points to another institutional complication: moving lenders from one regulatory regime to another may not preserve credit availability if the replacement rules do not reflect the cost of serving small or higher-risk borrowers.
Interest rates, however, are only one part of the credit-access question. The location of the lender, its borrower assessment process, the size of loans it is willing to provide and its ability to understand local businesses can also shape whether a borrower receives finance. The report attributes these arguments to FIAFA but does not provide comparative data on loan pricing, defaults, borrower outcomes or the relative reach of banks and small NBFCs. Those are the measurements a formal review would need if it is to assess whether regulatory tightening is improving resilience or reducing access.
The urban dimension of the issue is easy to miss because the affected borrowers may operate outside large metropolitan centres. Semi-urban markets are linked to cities through transport, supply chains, construction activity and small-business employment. A vehicle financier’s decisions can influence the availability of goods movement, passenger transport and services that connect smaller settlements with urban centres. Credit regulation therefore works through the wider built environment and urban economy, even when the regulated entity is located in a regional market.
This is also why the debate cannot be reduced to a contest between regulators and lenders. The RBI’s supervisory challenge, as described by FIAFA, involves thousands of entities. The federation says that regulatory tightening is partly driven by the difficulty of supervising such a large number of institutions. A higher NOF threshold may be intended to improve the quality and manageability of the sector, but the report does not establish whether the measure is the most effective way to separate weak lenders from viable small institutions. Other dimensions—such as governance, disclosure, underwriting, recovery practices and borrower protection—are not examined in the supplied material.
The memorandum places the next decision with the Centre. FIAFA has asked for a freeze on further NOF increases, a separate regulatory framework and a review committee. The scheduled move to Rs 10 crore by March 2027 remains the key milestone identified in the report. What remains uncertain is whether the finance ministry, NITI Aayog or the RBI will formally respond, whether the proposed committee will be constituted, and whether any assessment will publish evidence on lender exits, borrower access and market concentration.
The evidence currently confirms a sharp disagreement over how small NBFCs should be regulated, not the final outcome of that disagreement. FIAFA’s case rests on the claimed local importance of these lenders, the reported cancellation of around 1,701 registrations after an earlier NOF increase and the possible effect of the 2027 threshold. The larger urban question is whether India can strengthen financial supervision without weakening the small-business and transport credit networks that support economies beyond the largest cities. The next meaningful test will be the official response to the federation’s memorandum and the evidence used to evaluate the Rs 10 crore requirement.
