What changed
The previous master circular from July 1, 2010 was superseded and updated with instructions issued up to June 30, 2011. The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs was withdrawn for all NBFCs registered with RBI and engaged in asset financing, loan, factoring, or investment activities. Banks can now extend need-based working capital and term loans to such NBFCs, and also finance against second-hand assets financed by them.
What it means for you
Banks have greater operational freedom to lend to registered NBFCs without a rigid NOF-linked cap, enabling more flexible credit decisions based on individual loan policies. However, restrictions on financing certain activities (e.g., bridge loans, advances against shares as collateral, guarantees for fund placement) remain in force. Banks must ensure their loan policies are approved by their boards and comply with prudential exposure ceilings.
What you must do
- Update internal loan policies for NBFC financing to reflect removal of NOF-linked ceiling and incorporate board approval.
- Ensure compliance with remaining restrictions: no bridge loans, no advances against shares as collateral to NBFCs, and no guarantees for placement of funds with NBFCs.
- Monitor prudential exposure ceilings for NBFCs as per RBI guidelines and report accordingly.
- Review and classify NBFC borrowers as registered or not requiring registration to apply correct financing rules.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), NBFCs registered with RBI (asset financing, loan, factoring, investment companies), Residuary Non-Banking Companies (RNBCs), Factoring companies
Does this circular remove all limits on bank finance to NBFCs?
No. It removes the ceiling linked to Net Owned Fund only for registered NBFCs in specified activities. Other restrictions like prohibitions on bridge loans, advances against shares, and guarantees for fund placement still apply, along with prudential exposure ceilings.
Can banks now finance 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 NBFC's experience in that area.
What should banks do if an NBFC is not registered with RBI?
Banks must refer to Section 3 of the circular for rules on financing NBFCs not requiring registration. Such NBFCs may have different eligibility criteria and restrictions.