What changed
The ceiling on bank credit linked to NBFCs' Net Owned Fund (NOF) was withdrawn for all NBFCs registered with RBI and engaged in asset financing, loan, factoring, or investment activities.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. The circular consolidates all prior instructions issued up to June 30, 2012.
What it means for you
Banks gain greater operational freedom in lending to registered NBFCs, as the NOF-linked cap is removed. However, restrictions on financing certain activities (e.g., bridge loans, advances against shares as collateral) remain. Banks must formulate their own loan policies with board approval and adhere to prudential exposure ceilings.
What you must do
- Update internal credit policies to reflect removal of NOF-linked ceiling for registered NBFCs.
- Ensure board-approved loan policy covers need-based working capital and term loans to eligible NBFCs.
- Continue to observe prohibitions on bridge loans, advances against shares, and guarantees for NBFC fund placements.
- Monitor prudential exposure limits for NBFCs as per existing RBI norms.
- Review and align any legacy NBFC financing arrangements with this updated master circular.
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 apply to Regional Rural Banks?
No, the circular explicitly excludes Regional Rural Banks (RRBs) from its scope.
Are there any activities for which bank finance to NBFCs is still prohibited?
Yes, prohibitions remain on bridge loans/interim finance, advances against collateral security of shares to NBFCs, and guarantees for placement of funds with NBFCs.
What is the key change regarding the Net Owned Fund (NOF) ceiling?
The earlier ceiling on bank credit linked to NBFCs' NOF has been withdrawn for all NBFCs registered with RBI and engaged in principal business of asset financing, loan, factoring, or investment activities.