Master Circular: Bank Finance to NBFCs (2023)

What changed

This master circular consolidates all prior instructions on bank finance to NBFCs issued up to March 31, 2023, replacing the 2022 version. The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs has been withdrawn for all RBI-registered NBFCs engaged in asset financing, loan, factoring, or investment activities. Banks are now permitted to extend finance to NBFCs against second-hand assets financed by them.

What it means for you

Banks gain more flexibility in lending to registered NBFCs, as the NOF-linked cap is removed, allowing need-based working capital and term loans. However, restrictions on financing certain activities (e.g., bridge loans, advances against shares) remain. Banks must update their loan policies to reflect these changes and ensure compliance with prudential exposure norms.

What banks were required to do at the time

• Review and update your bank's loan policy for NBFC financing with board approval, incorporating the removal of NOF-linked ceilings.
• Ensure all new and existing NBFC exposures comply with prudential exposure norms and restrictions on prohibited activities.
• Train credit teams on the revised guidelines, especially the allowance for lending against second-hand assets.
• Monitor NBFC borrower classifications (registered vs. unregistered) to apply correct financing rules.

Who it affects

All Scheduled Commercial Banks (excluding RRBs), Credit risk and compliance departments, Relationship managers handling NBFC accounts, Board of Directors (for policy approval)