What changed
The previous master circular dated July 1, 2007, has been superseded and updated with instructions issued up to June 30, 2008. The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs registered with RBI and engaged in asset financing, loan, factoring, or investment activities has been withdrawn. Banks may now also extend finance to NBFCs against second-hand assets financed by them.
What it means for you
Banks now have greater operational freedom to lend to registered NBFCs without the earlier NOF-linked ceiling, allowing more flexible working capital and term loan structures. However, restrictions on financing sensitive activities (e.g., bridge loans, advances against shares) remain. Banks must formulate board-approved loan policies and adhere to RBI's prudential exposure norms.
What you must do
- Review and update your bank's loan policy for NBFCs with board approval, incorporating the removal of the NOF-linked ceiling.
- Ensure compliance with prudential exposure norms and restrictions on prohibited activities like bridge loans or advances against shares.
- Classify NBFC borrowers correctly as registered with RBI, not requiring registration, or RNBCs, and apply appropriate lending criteria.
- Monitor second-hand asset financing to NBFCs and align with the new flexibility allowed under the circular.
Who it affects
All Scheduled Commercial Banks (except Regional Rural Banks), NBFCs registered with RBI (asset financing, loan, factoring, investment activities), Residuary Non-Banking Companies (RNBCs), Factoring companies
Is the NOF-linked ceiling completely removed for all NBFCs?
No, it is withdrawn only for NBFCs that are registered with RBI and engaged in principal business of asset financing, loan, factoring, or investment activities. Other NBFCs may still be subject to different norms.
Can banks now lend to NBFCs against second-hand assets?
Yes, the circular explicitly allows banks to extend finance to NBFCs against second-hand assets financed by them, based on the experience gained by NBFCs in this area.
What restrictions on bank finance to NBFCs still apply?
Prohibitions on bridge loans/interim finance, advances against collateral security of shares to NBFCs, and restrictions on guarantees for placement of funds with NBFCs remain in force.