Reserve Bank of India (Small Finance Banks – Credit Risk Management) Directions, 2025

1. Credit risk rules for SFBs

This document sets the credit risk management rules for small finance banks.

2. Who is covered

These Directions apply to every small finance bank.

1. Board policy on credit risk

The Board must approve a full policy on managing credit risk.

1. Follow the guidance note

The lender must follow the guidance note on credit risk management strictly.

2. Test the hard cases

Sensitivity tests must cover project delays and cost overruns, mainly on infrastructure.

3. Check the promoter money

The source and quality of the promoter's own capital must be checked.

4. Parent debt is not equity

Debt of the parent company must not be passed off as equity in the subsidiary.

5. Limits on unsecured credit

Limits must be set for every unsecured consumer credit exposure.

6. Committee watches the limits

The risk committee must keep those limits under watch at all times.

7. Allow for calamities

Credit assessment must allow for the effect of a calamity on the borrower.

1. No loan on own shares

A lender cannot lend against the security of its own shares.

2. Staff rate is the floor

Such a loan cannot carry a rate lower than the rate charged to employees.

3. Director facility fully secured

A non-fund facility for a director must be fully backed by cash of equal value.

4. Wrong write-off is void

A remission made against the law has no effect at all.

5. No funding share buy-back

A lender cannot fund a company buying back its own shares.

1. Board owns related party rules

The Board carries overall responsibility for the related party lending policy.

2. Extra safeguards required

The policy must set extra safeguards against the risks of related party lending.

3. Staff and their relatives

The policy must cover lending to specified employees and their relatives.

4. Cap on related party loans

The policy must set a total limit for loans to related parties.

5. Sub-limits within the cap

Inside that total there must be sub-limits for one party and for a group.

6. Inside RBI limits

Those limits must sit inside the exposure limits RBI already sets.

7. Judged transaction by transaction

The materiality threshold applies to each loan on its own.

8. Board sanctions the big ones

A loan above that threshold must be sanctioned by the Board or its committee.

9. Step out of the room

Anyone connected to the borrower must take no part in the decision.

10. Yearly report to the Board

Loans to specified employees and their relatives are reported to the Board each year.

11. Deviations to audit

Any departure from the policy must be reported to the audit committee with reasons.

12. Breach draws action

Breaking or dodging these rules brings supervisory and enforcement action.

13. No ozone harming units

No finance may be given for a new unit making or using ozone depleting substances.

1. Country risk policy

The country risk policy must fix who is responsible at each level.

2. Board reviews the policy

The Board must review that policy from time to time in the light of experience.

3. Know the customer abroad

Customer identification must not be relaxed for international business.

4. Country risk in the file

Country risk must be named openly when the counterparty is assessed.

5. Count both kinds

Both funded and non-funded exposures count when country risk is measured.

6. Indirect risk counts too

Indirect country risk must be taken into account.

7. No better than the country

An internal country rating cannot be better than the international agency rating.

8. Watch it live

Country exposures must be monitored on a real time basis.

9. Stress test the country

Country risk management must include stress testing.

10. Board looks every quarter

The Board must review country exposures every quarter.

1. Unhedged currency watched

Unhedged foreign currency exposure of borrowers must be measured and provided for.

2. Yearly currency check

Foreign currency exposure of every entity must be worked out at least once a year.

3. Five year horizon

Items maturing over the next five years count in that exposure.

4. Quarterly from the borrower

The borrower must supply unhedged exposure figures every quarter.

5. Audited once a year

Those figures must be audited and certified by the statutory auditor each year.

6. Worst year in ten

Potential loss is worked out using the largest yearly swing in the rupee over ten years.

7. Counted every quarter

The extra provision and capital must be worked out at least every quarter.

8. Floor of twenty basis points

The extra provision can never fall below 20 basis points.

9. Counts in Tier 2

That extra provision counts as a general provision and enters Tier 2 capital.

10. Into the rating system

Unhedged currency risk must enter the internal credit rating system.

11. Internal currency limits

Internal limits must be set for unhedged foreign currency exposure.

1. Valuer must be independent

A valuer must be professionally qualified and free of any interest in the property.

2. Two reports above ₹50 crore

A property valued at ₹50 crore or more needs two independent valuation reports.

BankPulse example. A property valued at ₹65 crore needs two independent valuation reports. That is because it is ₹50 crore or above. A property valued at ₹30 crore is below ₹50 crore, so this rule does not apply.

3. Keep a list of valuers

The lender must keep a register of approved valuers.

4. Qualifications from the law

The qualifications set must follow those in the Wealth Tax Act.

1. Registry open to all

The central registry records must be open to search by any lender or person.

1. Free below ₹10 crore

Below ₹10 crore of total banking system exposure, current accounts carry no restriction.

2. Check every half year

Accounts must be checked at least once every six months.

3. Three months to fix

Conversion or closure must be finished within three months of finding the account ineligible.

4. Flag it in the system

Such accounts must be flagged in the core banking system.

5. Watch borrower and account

Where a borrower has several accounts, both the borrower and each account must be watched.

6. Only the stated business

An account may be used only for the business it was opened for.

7. No pass-through use

These accounts must never be used to pass money for third parties.

1. Sixty per cent as loan

For such borrowers, 60 per cent of the working capital limit must be drawn as a loan.

2. Commercial paper counts

Commercial paper the lender buys counts inside that loan portion.

3. Intra-day is outside

The minimum loan portion rule does not apply to intra-day credit.

1. Old actions preserved

Anything already done under the old rules stays governed by those old rules.

2. Approvals carried over

Approvals given under the cancelled rules are now treated as given under these rules.

3. Other laws still apply

These Directions add to other laws. They do not replace any of them.

BankPulse example. A bank follows these Directions and thinks the matter is closed. It is not. Any other laws, rules, regulations or directions in force still apply on top. Where another one asks for more, the bank does the more.