RBI's Revised Master Circular: Comprehensive Regulations on Bank Financing to NBFCs

The RBI's revised Master Circular, consolidating all instructions issued up to April 23, 2024, outlines regulations governing bank financing to Non-Banking Financial Companies (NBFCs).

It aims to enhance credit availability while mitigating associated risks through a balanced approach of deregulation and targeted restrictions. Key guidelines are as follows:

Background and Scope:

The RBI has deregulated bank credit operations to provide more operational freedom, especially concerning Non-Banking Financial Companies (NBFCs) mandated to register with the RBI. Despite these deregulations, restrictions remain on financing certain sensitive NBFC activities to manage associated risks effectively.

Bank Finance to Registered NBFCs:

• Removal of credit ceiling linked to Net Owned Fund (NOF) for all registered NBFCs engaged in asset financing, loan, factoring, and investment activities.

• Banks can provide working capital and term loans, including finance against second-hand assets.

Bank Finance to Non-Registered NBFCs:

Exempted NBFCs can receive credit based on standard factors like credit purpose, asset quality, repayment capacity, and risk perception.

Activities Not Eligible for Bank Credit:

Prohibited activities include certain bill discounting, investments in shares/debentures, unsecured loans, loans to subsidiaries, and financing IPO subscriptions.

Finance to Factoring Companies:

Banks can support factoring companies under specific conditions, ensuring security by hypothecation or assignment of receivables.

Prohibitions on Bank Finance:

• Restrictions on bridge loans, interim finance, advances against shares, and guarantees for NBFC fund placements.

• Shares and debentures cannot be collateral for secured loans to NBFCs.

Prudential Ceilings for Bank Exposure:

• Exposure limits based on capital base, stricter limits for certain NBFC categories, and intra-group exposure limits apply.

• Special caps for NBFCs predominantly lending against gold jewelry.

Investment Restrictions:

Guidelines restrict bank investments in NBFC-issued securities, emphasizing prudent investment practices.

Risk Management:

Banks must adhere to risk weights prescribed for credit extended to NBFCs, ensuring capital adequacy as per RBI guidelines.

These guidelines ensure a balanced approach to supporting NBFCs' financial needs while safeguarding the stability and integrity of the financial system under RBI oversight.