What changed
The previous ceiling on bank credit linked to NBFCs' Net Owned Fund (NOF) has been removed for all NBFCs registered with RBI and engaged in asset financing, loan, factoring, or investment activities. Banks can now provide need-based working capital and term loans to these NBFCs, subject to prudential exposure norms. Additionally, banks may finance NBFCs against second-hand assets financed by them.
What it means for you
Banks have greater operational freedom to lend to registered NBFCs without the earlier NOF-linked cap, enabling more flexible credit decisions. However, restrictions on financing certain activities (like bridge loans, advances against shares, and guarantees for fund placements) remain in force. Banks must ensure their loan policies are board-approved and comply with prudential exposure limits.
What you must do
- Update internal credit policies to reflect removal of NOF-linked ceiling for registered NBFCs.
- Ensure board approval for any revised loan policy covering NBFC financing.
- Continue to adhere to prudential exposure norms and restrictions on prohibited activities (e.g., bridge loans, advances against shares).
- Review and monitor compliance with Section 35A of the Banking Regulation Act, 1949.
Who it affects
All Scheduled Commercial Banks (excluding RRBs)
Does this circular remove all restrictions on bank finance to NBFCs?
No. While the NOF-linked ceiling is withdrawn for registered NBFCs, restrictions on financing certain activities—like bridge loans, advances against collateral security of shares, and guarantees for fund placements—continue to apply.
Can banks now finance NBFCs against second-hand assets?
Yes, banks may extend finance to NBFCs against second-hand assets financed by them, based on the NBFC's experience in such financing.
What is the effective date of this master circular?
The circular is dated April 1, 2022, and consolidates instructions issued up to March 31, 2022.