What changed
This master circular is a reproduction of the July 2006 circular with only structural modifications; no substantive instructions were changed. The ceiling on bank credit linked to Net Owned Fund (NOF) for registered NBFCs remains withdrawn, allowing need-based working capital and term loans.
What it means for you
Banks have continued operational freedom to finance registered NBFCs without NOF-linked caps, but must adhere to prudential norms and board-approved policies. Restrictions on financing certain activities—like bridge loans, advances against share collateral, and guarantees for fund placements—remain in force to manage systemic risk.
What you must do
- Review and update your bank's loan policy for NBFC financing with board approval, ensuring compliance with RBI prudential and exposure norms.
- Ensure no credit is extended to NBFCs for prohibited activities listed in paragraphs 5 and 6 of the circular, such as bridge loans or advances against share collateral.
- Verify that all NBFC borrowers are registered with RBI (unless exempt) and classify them correctly for credit assessment.
- Monitor exposure to NBFCs against second-hand assets and ensure proper valuation and documentation.
Who it affects
All scheduled commercial banks (except Regional Rural Banks), NBFCs registered with RBI, Residuary Non-Banking Companies (RNBCs), Bank credit and risk management teams
Is there any change in the ceiling on bank credit to NBFCs in this circular?
No, the ceiling linked to Net Owned Fund (NOF) remains withdrawn for registered NBFCs. Banks can extend need-based credit as per board-approved policies.
Can banks finance NBFCs against second-hand assets?
Yes, banks may extend finance to NBFCs against second-hand assets financed by them, based on their experience and board-approved policy.
What activities are prohibited for bank finance to NBFCs?
Prohibited activities include bridge loans or interim finance, advances against collateral security of shares, and guarantees for placement of funds with NBFCs.