What changed
The ceiling on bank credit linked to Net Owned Fund (NOF) was withdrawn for NBFCs registered with RBI and engaged in equipment leasing, hire-purchase, loan, and investment activities. Banks can now extend need-based working capital and term loans to these NBFCs, and finance second-hand assets financed by them.
What it means for you
Banks gain greater operational freedom in lending to registered NBFCs, as the earlier NOF-linked cap is removed. This could increase credit flow to the NBFC sector, but banks must still adhere to prudential guidelines and exposure norms set by RBI.
What you must do
- Formulate a board-approved loan policy for extending credit to registered NBFCs within RBI's prudential guidelines.
- Ensure NBFCs are registered with RBI and engaged in eligible activities before extending need-based working capital or term loans.
- Apply the statutory definition of Net Owned Fund when lending to Residuary Non-Banking Companies (RNBCs).
- Avoid financing activities listed in paragraph 5 of the master circular, such as bills discounted/rediscounted by NBFCs (except for specific vehicle bills), investments of NBFCs, unsecured loans/inter-corporate deposits, loans to subsidiaries/group companies, and finance for IPO subscriptions.
Who it affects
All commercial banks, Registered NBFCs engaged in equipment leasing, hire-purchase, loan, and investment, Residuary Non-Banking Companies (RNBCs)
Does this circular apply to all NBFCs?
No, it applies only to NBFCs registered with RBI and engaged in equipment leasing, hire-purchase, loan, and investment activities. NBFCs not requiring registration (e.g., insurance companies, Nidhi companies) are covered under usual credit decision factors.
What is the Net Owned Fund (NOF) definition for RNBCs?
NOF is defined as per Section 45-IA of the RBI Act: paid-up equity capital plus free reserves, minus accumulated losses, deferred revenue expenditure, intangible assets, and investments in subsidiaries, group companies, other NBFCs, and loans/debentures to them.
Can banks finance second-hand assets through NBFCs?
Yes, banks may extend finance to NBFCs against second-hand assets financed by them, based on the experience gained by NBFCs in this area.