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Scheduled commercial banks must follow the regulatory policy regarding bank finance to non-banking financial companies. The Reserve Bank of India consolidates instructions on bank financing of non-banking financial companies up to March 31, 2022. Banks extend working capital facilities and term loans to registered non-banking financial companies subject to specific prohibitions, exposure ceilings, and investment restrictions. Banks do not finance certain activities such as specific bill rediscounting, unsecured loans, and loans to subsidiaries. Banks restrict exposure to a single non-banking financial company to 20 percent of their Tier I capital, and to gold loan companies to 7.5 percent of capital funds.
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RBI/2022-23/14 DOR.CRE.REC.No.07/21.04.172/2022-23 April 01, 2022
All Scheduled Commercial Banks (excluding RRBs)
Madam/ Dear Sir,
Master Circular - Bank Finance to Non-Banking Financial Companies (NBFCs)
Please refer to our Master Circular DOR.CRE.REC.No.77/21.04.172/2021-22 dated January 05, 2022 on the captioned subject. This Master Circular consolidates instructions on the above matter issued up to March 31, 2022.
Yours faithfully,
(Manoranjan Mishra) Chief General Manager
To lay down the Reserve Bank of India's regulatory policy regarding financing of NBFCs by banks.
A statutory guideline issued under Section 35A of Banking Regulation Act, 1949.
Master Circular DOR.CRE.REC.No.77/21.04.172/2021-22 dated January 05, 2022 on ‘Bank Finance to Non-Banking Financial Companies (NBFCs)’.
To all Scheduled Commercial Banks (excluding Regional Rural Banks).
Reserve Bank of India has been regulating the financial activities of the Non-Banking Financial Companies under the provisions of Chapter III B of the Reserve Bank of India Act, 1934. With the amendment of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45 IA of the said Act, and amendment of the National Housing Bank Act, 1987 in August 2019, in terms of Section 29 A of the National Housing Bank Act, 1987, all Non-Banking Financial Companies including Housing Finance Companies have to be mandatorily registered with the Reserve Bank of India.
The credit related matters of banks have been progressively deregulated by Reserve Bank of India. Consistent with the policy of bestowing greater operational freedom to banks in the matter of credit dispensation and in the context of mandatory registration of NBFCs with the Reserve Bank, most of the aspects relating to financing of NBFCs by banks have also been deregulated. However, in view of the sensitivities attached to financing of certain types of activities undertaken by NBFCs, restrictions on financing of such activities continue to be in force.
2.1 The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs has been withdrawn in respect of all NBFCs which are statutorily registered with RBI and are engaged in principal business of asset financing, loan, factoring and investment activities. Accordingly, banks may extend need based working capital facilities as well as term loans to all NBFCs registered with RBI and engaged in infrastructure financing, equipment leasing, hire-purchase, loan, factoring and investment activities subject to provisions of para 8 of these guidelines.
2.2 In the light of the experience gained by NBFCs in financing second hand assets, banks may also extend finance to NBFCs against second hand assets financed by them.
2.3 Banks may formulate suitable loan policy with the approval of their Boards of Directors within the prudential guidelines and exposure norms prescribed by the Reserve Bank to extend various kinds of credit facilities to NBFCs subject to the condition that the activities indicated in paragraphs 4 and 6 are not financed by them.
In terms of “Master Direction - Exemptions from the provisions of RBI Act, 1934” dated August 25, 2016, few categories of non-banking financial companies are exempted from certain provisions of the Reserve Bank of India Act, 1934 (the RBI Act, 1934), including the need for registration with the Reserve Bank. For such NBFCs not needing registration with the Reserve Bank, banks may take their credit decisions on the basis of usual factors like the purpose of credit, nature and quality of underlying assets, repayment capacity of borrowers as also risk perception, etc.
The following activities undertaken by NBFCs, are not eligible for bank credit:
As banks can extend financial assistance to equipment leasing companies, they should not enter into lease agreements departmentally with such companies as well as other Non-Banking Financial Companies engaged in equipment leasing.
Notwithstanding the restrictions mentioned at Paragraph 4.1 (i) and 4.1 (iii) above, banks can extend financial assistance to support the factoring business of Factoring Companies, which comply with the following criteria:
Banks should not grant bridge loans of any nature, or interim finance against capital / debenture issues and / or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of Non-Banking Financial Companies. Banks should strictly follow these instructions and ensure that they are not circumvented in any manner whatsoever by purport and / or intent by sanction of credit under a different nomenclature like unsecured negotiable notes, floating rate interest bonds, etc., as also short-term loans, the repayment of which is proposed / expected to be made out of funds to be or likely to be mobilised from external / other sources and not out of the surplus generated by the use of the asset(s).
