Small Finance Banks – Transfer and Distribution of Credit Risk Directions, 2025

RBI/DOR/2025-26/190
DOR.STR.REC.109/21.04.048/2025-26

November 28, 2025

Reserve Bank of India (Small Finance Banks – Transfer and Distribution of Credit Risk) Directions, 2025

Table of Contents
Chapter I - Preliminary
PART A - TRANSFER OF LOAN EXPOSURES
Chapter I- Scope and Definitions
Chapter II- General Conditions applicable for all loan transfers
Chapter III-Transfer of Loans which are not in default
Chapter IV- Transfer of stressed loans
PART B - OTHER TYPES OF LENDING AND RISK TRANSFER ARRANGEMENTS
Chapter I- Lending under Consortium / Multiple Banking Arrangements
Chapter II- Inter-bank Participations
Chapter III- Transfer of Borrower Accounts at the Request/Instance of Borrower
PART C: REPEAL AND OTHER PROVISIONS
Annex I
Annex II
Annex III

Introduction

Credit Risk Transfer and Distributions are resorted to by lending institutions for multitude of reasons ranging from liquidity management and rebalancing their exposures or strategic sales. RBI has been taking several steps towards its development through Directions/Guidelines on transfer of loan exposures, inter-bank participations, consortium arrangements and others. In this regard, the Reserve Bank hereby issues a comprehensive and self-contained framework of regulatory guidelines governing different avenues of credit risk transfer and distribution. Accordingly, in exercise of powers conferred by sections 21 and 35A of the Banking Regulation Act, 1949; the Reserve Bank being satisfied that it is necessary and expedient in the public interest so to do, hereby issues these Directions hereinafter specified.

Chapter I - Preliminary

A. Short title and commencement

1. These directions shall be called the Reserve Bank of India (Small Finance Banks – Transfer and Distribution of Credit Risk) Directions, 2025.

2. These Directions shall come into effect on the day it is placed on the official website of the Reserve Bank of India.

B. Applicability

3. These directions shall be applicable to Small Finance Banks (hereinafter collectively referred to as 'banks' and individually as a 'bank').

Provided that Small Finance Banks are permitted for purchase of portfolios of loans classified as standard assets only from banks and Non-Banking Financial Companies (NBFCs) for the specific purpose of meeting the sub-targets within the 40% Priority Sector Lending (PSL) target as applicable to commercial banks.

Provided further that Small Finance Banks are not permitted for purchase of Stressed Loans.

Provided further that Small Finance Banks are permitted for investing in Inter Bank Participation Certificates for the specific purpose of meeting the sub-targets within the 40% PSL target as applicable to commercial banks.

C. Definitions

4. The terms have been defined in the respective Parts of this Direction.

5. All other expressions, unless defined in the respective parts, shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934 or any statutory modification or re-enactment thereto or any other relevant regulation or as used in commercial parlance, as the case may be.

PART A - TRANSFER OF LOAN EXPOSURES

6. Loan transfers are essential to the development of a credit risk market, enabling diversification of credit risk originating in the banking sector and ensure the availability of market-based credit products for a diversified set of investors having commensurate capacity and risk appetite.

Chapter I- Scope and Definitions

A. Applicability and Purpose

7. Banks shall acquire loans only from a transferor specified as a lender in paragraph 12(4) unless specifically permitted.

8. No bank shall undertake any loan transfers or acquisitions other than those permitted under Part A of this direction and in the manner prescribed therein.

Explanation: The above proviso shall be without prejudice to the provisions of Reserve Bank of India (Small Finance Banks – Securitisation Transactions) Directions, 2025; Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019; obtention of guarantees; or products explicitly permitted in terms of RBI guidelines.

9. The directions in Part A will be applicable to all loan transfers undertaken by the bank, including transfer of loans through novation or assignment, and loan participation.

Provided that in cases of loan transfers other than loan participation, legal ownership of the loan shall be mandatorily transferred to the transferee(s) to the extent of economic interest transferred.

10. These directions shall apply only to SFBs as transferor(s) or transferee(s) in loan transfers, unless specifically made applicable to other categories of entities as transferee(s) as per the specific permissions as per paragraphs 58 and 62.

11. In respect of transferee(s) other than lenders mentioned in paragraph 12(4) and Asset Reconstruction Companies (ARCs), which are also financial sector entities, the prudential norms, including asset classification and provisioning post the transfer shall be as per the respective regulatory frameworks laid down by the respective financial sectoral regulators, viz., Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority, and International Financial Services Centres Authority.

B. Definitions

12. For the purpose of the Part A of these Directions, following definitions shall apply:

(1) “credit enhancement” means a contractual arrangement in which an entity provides some degree of added protection to other parties to a transaction so as to mitigate the credit risk of their acquired exposures;

(2) “default’ means non-payment of debt (as defined under the Insolvency and Bankruptcy Code, 2016) when whole or any part or instalment of the debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;

Provided that for revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days.

(3) “Economic Interest” refers to the risks and rewards that may arise out of loan exposure through the life of the loan exposure;

(4) “Lenders” shall include the following set of entities,
Scheduled Commercial Banks; Regional Rural Banks; Local Area Banks; Primary (Urban) Co-operative Banks; State Co-operative Banks/ Central Co-operative Banks; All India Financial Institutions (NABARD, NHB, EXIM Bank, SIDBI and NaBFID); Small Finance Banks; Non-Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs).
Provided that Regional Rural Banks; Local Area Banks; and Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-operative Banks are permitted as only transferor(s) of stressed loans under Chapter IV of Part A of these Directions and are not permitted as transferors(s) or transferee(s) in any other type of loan transfers.

(5) “loan participation” means a transaction through which the transferor transfers all or part of its economic interest in a loan exposure to transferee(s) without the actual transfer of the loan contract, and the transferee(s) fund the transferor to the extent of the economic interest transferred which may be equal to the principal, interest, fees and other payments, if any, under the transfer agreement;
Provided that the transfer of economic interest under a loan participation shall only be through a contractual transfer agreement between the transferor and transferee(s) with the transferor remaining as the lender on record.
Provided further that in case of loan participation, the exposure of the transferee(s) shall be to the underlying borrower and not to the transferor. Accordingly, the transferor and transferee(s) shall maintain capital according to the exposure to the underlying borrower calculated based on the economic interest held by each post such transfer. The applicable prudential norms, including the provisioning requirements, post the transfer, shall be based on the above exposure treatment and the consequent outstanding.