REC, PFC, IRFC: Jefferies on RBI rule shift – 4 PSU NBFCs  set for regulatory upgrade

The brokerage pointed out that the change removes volatility in classification and provides a more predictable framework, even as entities in the Upper Layer will continue to face tighter capital norms, governance requirements and supervisory oversight. While the report does not assign fresh target prices in this note, Jefferies maintains Buy ratings on several NBFC names it covers, backed by size, balance sheet strength and positioning within the regulatory structure.

Jefferies on REC: Likely entry into Upper Layer strengthens positioning

Jefferies said REC is among the largest NBFCs by asset size and is expected to be included in the Upper Layer under the revised framework given its scale.

The brokerage’s assessment rests on the proposed threshold of Rs1,00,000 crore in assets, which REC comfortably exceeds. Inclusion in the Upper Layer places it among systemically important lenders that are subject to tighter supervision, something the brokerage sees as reinforcing its standing rather than weighing on it.

“Eligible PSU NBFCs that meets the threshold will be classified into NBFC-UL,” Jefferies said in the report.

Jefferies added that the shift to an asset-size based approach removes earlier uncertainties tied to scoring parameters, which had the potential to move companies across layers even without meaningful changes in their underlying business.

For REC, the implication is stability in regulatory classification along with recognition of its scale within the system. The brokerage’s broader coverage continues to favour large, well-capitalised NBFCs where size itself becomes a differentiating factor.

Jefferies on PFC: Scale puts it firmly in the regulatory bracket

Power Finance Corporation also features prominently in Jefferies’ list of likely additions to the Upper Layer.

The brokerage noted that PFC’s asset base places it well above the proposed Rs1,00,000 crore cut-off, making its inclusion under the new framework a mechanical outcome rather than a judgement-based one.

“It suggests classification of Upper Layer NBFCs to a purely asset size based metric,” Jefferies said.

This change removes the need for parameter-based scoring, which earlier considered multiple variables and could introduce variability in outcomes.

For PFC, Jefferies believes the new framework offers greater visibility on its regulatory standing. While Upper Layer entities face stricter norms, the brokerage pointed out that such classification also brings them into a more closely monitored group of lenders that are seen as systemically relevant.

The report’s broader tone indicates that scale-driven classification aligns regulation more closely with balance sheet size.

Jefferies on IRFC: Regulatory inclusion backed by asset size

Indian Railway Finance Corporation is another name Jefferies expects to move into the Upper Layer under the revised norms.

The brokerage’s reasoning is consistent with its view across public sector NBFCs, where asset size becomes the sole determinant under the proposed framework.

“This replaces the earlier parametric or scoring based methodology and also eliminates scoring volatility for large diversified NBFCs,” Jefferies said.

For IRFC, the removal of scoring-based classification is particularly relevant given its specialised lending model and large balance sheet.

Jefferies suggested that the earlier approach could create movement across categories even when business fundamentals remained intact. The asset-size based rule, in contrast, locks classification to scale.

The brokerage’s stance indicates that IRFC’s inclusion is less about incremental regulatory burden and more about formal recognition of its size within the system.

Jefferies on HUDCO: Entry into Upper Layer seen under new framework

Housing and Urban Development Corporation is also expected to be added to the Upper Layer, according to Jefferies.

The brokerage pointed to its asset base crossing the proposed Rs1,00,000 crore threshold, which makes it eligible under the revised classification.

“NBFCs classified in upper layer are subject to tighter regulatory and supervision including tighter capital norms, enhanced governance, mandatory listing and stricter supervisory oversight,” Jefferies said.

While these requirements raise compliance expectations, Jefferies’ analysis suggests that large public sector NBFCs are already operating with governance structures that align with such norms.

For HUDCO, inclusion brings it into a group of lenders that are more closely monitored, which the brokerage sees as part of a broader effort to align regulation with size and systemic importance.

Jefferies on PNB Housing Finance: Possible exit from Upper Layer

On the other side of the change, Jefferies indicated that some existing Upper Layer NBFCs may move out under the new framework.

PNB Housing Finance is among those mentioned, as its asset size may not meet the revised threshold.

“PNB Housing and others can exit UL,” the brokerage said.

The shift away from a scoring model means that companies which previously qualified based on a combination of parameters may no longer remain in the category if they fall short on size.

Jefferies’ analysis suggests that this is a structural outcome of the new rule rather than a commentary on business fundamentals.

The brokerage also noted that the earlier system could place companies in higher regulatory buckets based on multiple factors, whereas the new approach narrows the entry condition to a single measurable metric.

Jefferies on regulatory changes: 5-year review cycle and added flexibility

Beyond classification, Jefferies highlighted two additional elements in the Reserve Bank of India’s proposal.

The first is a formal review cycle, with the framework set to be revisited once every five years. This introduces a defined timeline for reassessment rather than ad hoc changes.

The second relates to the use of state government guarantees.

“NBFC-ULs may use State govt guarantees as unrestricted credit risk transfer instrument, subject to conditions,” Jefferies said.

This provision allows Upper Layer NBFCs to factor in such guarantees within their risk management framework, although the report does not go into operational detail on how this will be implemented.

Jefferies’ commentary indicates that these additions complement the move towards a simpler classification structure.

Conclusion

Jefferies’ note points to a decisive move by the Reserve Bank of India to base Upper Layer classification entirely on asset size, replacing a multi-parameter scoring system that could lead to variability. 

The change removes classification volatility and ties regulatory status directly to scale, even as entities in the Upper Layer continue to operate under tighter norms on capital, governance and supervision.

Disclaimer: The proposed regulatory shift by the RBI introduces a simplified classification for Upper Layer NBFCs, directly linking tighter oversight to asset scale. While these changes and the associated brokerage commentary reflect market analysis of systemic importance and regulatory stability, they are not a recommendation to buy or sell specific securities. Investors should evaluate these developments in the context of their own financial goals and consult a SEBI-registered professional before making investment decisions based on regulatory transitions or brokerage ratings.

This disclaimer has been generated using AI to support user well-being and responsible content consumption.