RBI Issues Draft Directions on Non-Fund Based Credit Facilities: Bridging the Regulatory Gap

Introduction

In furtherance of the policy measures articulated in the Statement on Developmental and Regulatory Policies[i], the Reserve Bank of India (‘RBI’), in exercise of its regulatory powers under applicable laws, has issued draft directions on four significant subject matters. The four draft directions notified are as follows:

• RBI (Securitisation of Stressed Assets) Directions, 2025

• RBI (Co-Lending Arrangements) Directions, 2025

• RBI (Lending Against Gold Collateral) Directions, 2025

• RBI (Non-Fund Based Credit Facilities) Directions, 2025

Updates on the remaining three draft directions have been published separately on the firm’s website. This note focuses exclusively on the RBI (Non-Fund Based Credit Facilities) Directions, 2025 (‘NFBC Directions’)[ii], which warrant detailed consideration given their implications for the treatment of contingent credit exposures by regulated entities (‘REs’).

The NFBC Directions

The NFBC Directions aim to establish a unified regulatory framework governing NFB credit facilities across various REs, including Commercial Banks, Regional Rural Banks (‘RRBs’), Local Area Banks (‘LABs’), Primary Urban Co-operative Banks (‘UCBs’), State Co-operative Banks (‘StCBs’), Central Co-operative Banks (‘CCBs’), All India Financial Institutions (‘AIFIs’), Non-Banking Financial Companies (‘NBFCs’), and Housing Finance Companies (‘HFCs’). The NFBC Directions are open for public and stakeholder comments until 12.05.2025.

Scope and Applicability

The Draft Directions are intended to apply uniformly to all aforementioned REs with respect to their NFB credit exposures. However, derivative exposures are excluded from the scope, except for general conditions laid down in the NFBC Directions. They also do not apply to exposures covered under the RBI (Prudential Framework for Resolution of Stressed Assets) Directions, 2019.

General Conditions for Issuance of NFB Facilities

• Eligibility Criteria: REs are permitted to issue NFB facilities only to customers with whom they have an existing business relationship, such as a funded credit facility or a deposit account. This condition ensures that REs have adequate knowledge of the customer’s financial standing and creditworthiness.

• Credit Policy Requirements: REs must incorporate specific provisions in their Board-approved credit policies to enable the issuance of NFB facilities. These provisions should detail the types of NFB facilities offered, credit appraisal processes, internal controls, fraud prevention measures, monitoring mechanisms, delegation of authority, and limits to prevent concentration risks.

• Credit Appraisal Standards: The credit appraisal for NFB facilities must be as rigorous as that for funded facilities. This includes a thorough assessment of the customer’s financial position, repayment capacity, and the purpose of the NFB facility.

Provisions for Guarantees

• Classification and Core Requirements: All guarantees and counter-guarantees issued by REs are classified into ‘financial guarantees’ and ‘performance guarantees’. All guarantees must be irrevocable, unconditional, and without recourse, with clearly defined terms of invocation and settlement. REs are required to honour invoked guarantees promptly, notwithstanding any dispute, and must ensure time-bound redressal of complaints relating to dishonour or delays.

• Board Policy and Risk Management: REs are mandated to formulate a Board-approved policy outlining the types of guarantees they may issue, appraisal standards, collateral requirements, exposure limits, and the internal approval and renewal process. The policy must ensure that unsecured guarantees do not result in excessive concentration risk, with suitable internal ceilings prescribed.

• Caps on Performance and Unsecured Guarantees: Only scheduled UCBs and NBFCs in the middle or upper regulatory layer may issue performance guarantees. Such guarantees are subject to a maximum tenor of 10 years, and the aggregate exposure on all guarantees cannot exceed 5% of the RE’s total assets. Within this, the exposure on unsecured guarantees is capped at 25% of the above limit.

• Electronic Guarantees and Process Controls: REs are encouraged to shift to electronic guarantees. For this purpose, a robust Standard Operating Procedure (SOP) must be established to ensure secure issuance, seamless invocation, real-time verification, and auditability. The transition to electronic form is aimed at improving transparency and efficiency in guarantee administration.

• Sector-Specific Conditions: The NFBC Directions lay down specific conditions applicable to certain sectors and instruments:

  • Letters of Credit (LCs) and co-acceptances must relate to genuine trade transactions and are subject to similar prudential norms.

  • In digital lending, any Default Loss Guarantee (DLG) arrangement must not substitute for due diligence by the RE. The RE must assess the creditworthiness of the borrower as if the loan were on its own books.

  • Guarantees involving foreign exchange obligations can be issued only by Authorised Dealer (‘AD’) Category-I banks. Guarantees for External Commercial Borrowings (ECBs) continue to be prohibited.

  • Guarantees in favour of stock exchanges and clearing corporations, in lieu of margin requirements, can be issued only by Scheduled Commercial Banks.

  • In the context of overseas investments, guarantees may be issued by AD banks subject to the conditions under the Overseas Investment Rules and Directions, including caps, financial limits, and regulatory reporting requirements.

• Limitations on Unsecured Guarantees: REs are expected to avoid undue concentration of unsecured guarantees. They must establish internal ceilings for the issuance of such guarantees to mitigate potential risks.

• Eligibility to Issue Performance Guarantees: While all NBFCs, UCBs, RRBs, StCBs, and CCBs can provide financial guarantees, performance guarantees can only be issued by scheduled UCBs and NBFCs classified in the middle and upper layers. These guarantees are subject to a maximum tenor of 10 years and must fall within specified exposure caps.

Partial Credit Enhancement (‘PCE’)

• Eligible REs for PCE: Specified REs, including SCBs, AIFIs, and NBFCs in the top, upper, and middle layers, as well as HFCs, are permitted to provide PCE facilities. PCE may be offered to bonds issued by:

  • Corporates or Special Purpose Vehicles (SPVs) for funding all types of projects.

  • Non-deposit taking NBFCs and HFCs registered with RBI, having an asset size of Rs. 1,000 crore and above, for refinancing their existing debt only.

• Form and Purpose of PCE: PCE may be provided only as an irrevocable contingent line of credit, not by way of guarantee. It is intended to cover shortfalls in cash flows for servicing bond obligations, thereby enhancing the bond’s credit rating and enabling issuers to access capital markets on more favourable terms. The PCE may be structured as a revolving facility at the RE’s discretion and must be extended at the time of bond issuance. The facility is to be used strictly for bond servicing purposes, not for acquiring assets, meeting project costs, or servicing other creditors.

• Restrictions and Eligibility Criteria: Specified REs are restricted from investing in corporate bonds that are credit-enhanced by other REs. PCE can be offered only for bonds with a pre-enhanced rating of BBB-minus or better, and such bonds must be rated by at least two external credit rating agencies at all times. Further, PCEs shall not exceed 20% of the bond issuance size and must be disclosed clearly in offer documents.

Disclosure Requirements

All REs are mandated to prepare and publish standardized balance sheet and maturity ladder statements as of March 31 each financial year (FY). These statements must clearly segregate the secured and unsecured portions of all guarantees, acceptances, endorsements, and other contingent liabilities, enhancing transparency and risk assessment. Additionally, REs must disclose the nature of electronic guarantees issued and the extent to which such instruments are covered by insurance or reinsurance arrangements.

Conclusion

The NFBC Directions signify a significant regulatory step by the RBI to bring clarity, uniformity, and prudential discipline to the treatment of NFBC exposures across the spectrum of REs. By prescribing detailed conditions for issuance, appraisal, exposure limits, and disclosures, the NFBC Directions aim to bridge existing gaps and mitigate risks posed by off-balance sheet liabilities.

In contrast to the earlier fragmented approach – where norms on guarantees, letters of credit, co-acceptances, and PCEs were scattered across various circulars and sector-specific guidelines (e.g., RBI Master Circulars on Guarantees and Co-Acceptances for SCBs and UCBs, 2015[iii]; or the various PCE guidelines[iv]) – the NFBC Directions consolidate these into a unified, cross-sectoral framework. This ensures consistent standards across banks, NBFCs, and cooperative institutions, while also updating certain regulatory thresholds and introducing safeguards such as caps on unsecured guarantees and mandatory transition to electronic guarantees.

Notably, while PCE norms were previously applicable only to select SCBs and AIFIs, the new framework permits broader participation by top-layer and middle-layer NBFCs and HFCs, subject to tighter conditions. Likewise, earlier sector-specific instructions permitted performance guarantees by UCBs and NBFCs with limited clarity on tenure and exposure caps; the NFBC Directions now specify a maximum tenor of 10 years and a 5% cap of total assets, enhancing risk control.

As the RBI opens the draft for public feedback until 12.05.2025, stakeholders should carefully evaluate the practical implications, especially in relation to existing policies, business models, and capital treatment. The proposed framework, once finalized, is poised to significantly influence the regulatory treatment of contingent exposures and bring NFBC exposures into sharper regulatory focus.

End Notes

[i] Press Release No. 2025-26/63 dated 09.04.2025.

[ii] RBI/2025-26/DOR.STR.REC. /13.07.010/2025-26.

[iii] Master Circular No. RBI/2014-15/23 dated 01.07.2014.

[iv] RBI Circulars RBI/2015-16/183 dated 24.09.2015, RBI/2016-17/43 dated 25.08.2016, RBI/2016-17/305 dated 18.05.2017.

Related Articles

As part of the same set of draft directions issued by the Reserve Bank of India, the following companion analyses are also available:

• RBI’s Draft Directions on Lending Against Gold Collateral, 2025: A Step Toward Harmonised and Responsible Credit Practices by Shivangi Bhardwaj

• Unifying the Framework & Strengthening Oversight: RBI’s Draft 2025 Directions on Co-Lending Arrangements Explained by Srishty Jaura

These articles are part of our ongoing coverage of the RBI’s recent regulatory consultations aimed at building a unified, transparent, and risk-sensitive credit ecosystem.

Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.