What changed
The 2013 master circular supersedes the July 2012 version, integrating all instructions issued up to June 30, 2013. It retains the deregulated approach for bank credit to registered NBFCs, including the removal of the Net Owned Fund (NOF) ceiling for NBFCs engaged in asset financing, loan, factoring, and investment activities. It also permits banks to finance NBFCs against second-hand assets they have financed.
What it means for you
Banks now have greater flexibility to extend need-based working capital and term loans to registered NBFCs without the earlier NOF-linked cap, enabling more tailored credit support. However, restrictions on bridge loans, advances against shares, and guarantees for fund placements remain, requiring careful compliance. The circular reinforces the need for banks to have board-approved loan policies for NBFC exposure.
What you must do
- Review and update your bank's loan policy for NBFCs with board approval, incorporating the 2013 master circular's provisions.
- Ensure compliance with prudential exposure ceilings and restrictions on prohibited activities like bridge loans and guarantees for fund placements.
- Assess and document the eligibility of NBFC borrowers, confirming they are registered with RBI (unless exempted) and engaged in permissible activities.
- Monitor exposure to NBFCs against second-hand assets, ensuring proper valuation and risk assessment.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), NBFCs registered with RBI (including those engaged in asset financing, loan, factoring, and investment activities), Residuary Non-Banking Companies (RNBCs)
Does this circular remove all limits on bank finance to NBFCs?
No, it removes the NOF-linked ceiling only for registered NBFCs engaged in asset financing, loan, factoring, and investment activities. Other prudential ceilings and restrictions on specific activities still apply.
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, subject to the bank's loan policy and risk assessment.
What activities remain ineligible for bank credit to NBFCs?
The circular continues to prohibit bridge loans, advances against collateral security of shares to NBFCs, and guarantees for placement of funds with NBFCs, among other restrictions detailed in the master circular.