Skip to main content

Non-Fund Based Credit Facilities

Reserve Bank of India (RBI) has issued directions on non-fund based credit facilities.

To whom shall the directions be applicable?

The directions shall apply to the following Regulated Entities (REs) for all their Non-Fund Based (NFB) exposures such as guarantee, letter of credit, co-acceptance etc.

  • Commercial Banks (including Regional Rural Banks and Local Area Banks)
  • 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) including Housing Finance Companies (HFCs) in Middle Layer and above, only for the issuance of Partial Credit Enhancement.

The directions shall not apply to the derivative exposures of a RE.

Which NFB facilities are permitted to be issued by RE?

  • RE shall issue a NFB facility only on behalf of a customer having funded credit facility from the RE. However, this shall not be applicable in respect of –
    • Derivative contracts entered into by RE with counterparty.
    • Partial Credit Enhancement facility.
    • NFB facilities issued based on the counter guarantee of another RE.
    • NFB facilities on behalf of an obligor who has not availed any fund based facility from any RE in India.
    • NFB facilities extended by a RE against No Objection Certificate issued by the REs which have provided fund based facility to the obligor.
    • NFB facilities which are fully secured by eligible financial collateral.
  • RE shall not issue a NFB facility to any entity assuring redemption / repayment of funds raised by any entity via deposits, issuance of bonds, or in any other form.

Who is obligor?

Obligor refers to a party against whose obligations, financial or otherwise, a NFB facility has been issued. In the case of guarantees, the obligor may also be termed as ‘principal debtor’.

What are the prudential norms for NFB facility converted to fund based facility?

Once a NFB facility devolves and is converted into a fund based facility, then the prudential norms shall be as applicable to fund based facilities.

What is guarantee?

Guarantee means a contract to perform the promise, or discharge the liability, of a third person in the contingent case of his non-performance or default. Guarantor refers to the party which issues the guarantee.

What are the directions on issuance of guarantees?

  • Guarantee (or a counter-guarantee) issued by a RE (guarantor) shall be irrevocable (i.e., there shall be no clause in the contract that would allow the guarantor to unilaterally cancel the same), unconditional (i.e. there shall be no clause in the contract that could prevent the RE from being obliged to pay out in a timely manner in the event that the original counterparty fails to meet its obligation), incontrovertible and shall contain a clear mechanism for honouring the same without demur as and when invoked.
  • RE shall not provide a guarantee favouring another RE to enable it to provide any fund based credit facility to an obligor (except credit facilities extended against guarantees pertaining to trade related transactions). However, RE may provide a guarantee favouring another RE for a NFB facility extended by the latter. 
  • REs permitted as Authorized Dealer (AD) may extend NFB facilities for bonafide current or capital account transaction, including guarantees in respect of debt or other liability incurred by an exporter on account of exports from India.
  • AD banks are also permitted to issue guarantee to or on behalf of a foreign entity, or any of its step-down subsidiary in which an Indian entity has acquired control through the foreign entity, which is backed by a counter-guarantee or collateral by the Indian entity or its group company. However, such guarantees shall not be issued by banks, including overseas branches / subsidiaries of Indian banks, for the purpose of raising loans / advances of any kind by the foreign entity except in connection with the ordinary course of business overseas. 
  • Only Scheduled Commercial Banks (SCBs) may issue guarantees on behalf of stock / commodity brokers in favour of stock / commodity exchanges in lieu of security deposit. SCBs may also issue guarantees in lieu of margin requirements.

What are the exposure limits for guarantees?

RE shall put in place suitable internal aggregate / individual ceilings for issuance of guarantees in general and unsecured guarantees in particular.

  • The total volume of guaranteed obligations of UCBs, RRBs, LABs, StCBs and CCBs outstanding at any time shall not exceed 5% of their total assets as per the previous financial year’s balance sheet. 
  • Unsecured guarantees of these REs shall be restricted to 1.25% of total assets. 
  • Any such RE in breach of the above stipulation shall meet the above threshold by April 01, 2027.

What is co-acceptance of bills?

Co-acceptance of bills means an undertaking to make payment to the drawer of the bill (seller / exporter) on due date if the buyer / importer fails to make the payment on that date.

What are the directions on co-acceptance of bills?

  • Only genuine trade bills shall be co-accepted, and it shall be ensured that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers.
  • RE shall not co-accept bills drawn by another RE or where the buyer / seller has received funding for the underlying trade transaction from any RE.

What is Partial Credit Enhancement (PCE)?

Partial Credit Enhancement (PCE) shall be a subordinated facility provided in the form of an irrevocable contingent line of credit which will be drawn in case of shortfall in cash flows for servicing the bonds and thereby may improve the credit rating of the bond issue. The contingent facility may, at the discretion of the PCE providing RE, be made available as a revolving facility.

What are the directions on PCE?

  • SCBs (excluding RRBs), AIFIs, NBFCs including HFCs in Middle Layer and above may provide PCE to bonds issued by –
    • Corporates / special purpose vehicles (SPVs) for funding all types of projects
    • Non-deposit taking NBFCs with asset size of ₹1,000 crore and above (including HFCs)
    • Municipal Corporations
  • PCE facility shall be provided at the time of the bond issue and shall be irrevocable. 

  • PCE cannot be provided by way of guarantee.
  • REs shall not invest in corporate bonds which are credit enhanced by other REs. However, they may provide other need based credit facilities (funded and / or non-funded) to the corporate / SPV.
  • REs may offer PCE only in respect of bonds whose pre-enhanced rating are atleast “BBB-” as issued by accredited External Credit Assessment Institutions (ECAI).
  • To be eligible for PCE, corporate bonds shall be rated by minimum 2 ECAI at all times.
  • PCE shall be available only for servicing the bond and not for any other purpose (such as funding acquisition of additional assets by the corporate, meeting part of the project cost or meeting recurring expenses of the corporate or servicing other lenders / creditors to the project etc.), irrespective of the seniority of claims of other creditors in relation to the bond holders.
  • In case the PCE facility is partly drawn and interest accrues on the same, the unpaid accrued interest shall be excluded from the calculation of the remaining amount available for drawing.
  • PCE facilities to the extent drawn shall be treated as an on-balance sheet advance. Undrawn facilities would be an off-balance sheet item and reported under ‘Contingent Liability – Others’.
  • A drawn tranche of the contingent PCE facility shall be required to be repaid within 30 days from the date of its drawal (due date). The facility shall be treated as NPA if it remains outstanding for 90 days or more from the due date and provided for as per the usual asset classification and provisioning norms. In that event, the RE’s other facilities to the borrower shall also be classified as NPA.

What are the exposure limits for PCE?

  • PCE exposure limit by a single RE shall be 50% of the bond issue size. 
  • The aggregate exposure limit of all REs towards the PCE for a given bond issue has also been capped at 50% of the bond issue size.
  • PCE exposure by a RE to a single counterparty or group of counterparties shall be within the overall regulatory exposure limits applicable to each category of RE.
  • The aggregate PCE exposure of a RE shall not exceed 20% of its Tier 1 capital.

What are the additional conditions for providing PCE to bonds of NBFCs and HFCs?

  • The tenor of the bond issued by NBFCs / HFCs for which PCE is provided shall be atleast 3 years.
  • The proceeds from the bonds backed by PCE from REs shall only be utilized for refinancing the existing debt of the NBFCs / HFCs. 
  • The exposure of a RE by way of PCEs to bonds issued by each such NBFC / HFC shall be restricted to 1% of capital funds of the RE within the extant single / group borrower exposure limits.

From when shall the directions be applicable?

  • The directions shall come into force from April 1, 2026, or from any earlier date as decided by a RE as per its internal policy. 


References

Reserve Bank of India. (2025, August 06). 'Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12889&Mode=0


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Reserve Bank - Integrated Ombudsman Scheme, 2026 (RB-IOS, 2026)

Reserve Bank of India (RBI) has issued Reserve Bank - Integrated Ombudsman Scheme, 2026. Who is RBI Ombudsman and RBI Deputy Ombudsman? RBI may appoint one or more of its officers as RBI Ombudsman and RBI Deputy Ombudsman, to carry out the functions entrusted to them under the Reserve Bank - Integrated Ombudsman Scheme (RB-IOS).  The appointment of RBI Ombudsman or RBI Deputy Ombudsman shall be for up to 3 years at a time. RBI Ombudsman shall have the power to examine and close all complaints.   RBI Deputy Ombudsman shall have the power to close those complaints falling under clause 10 of the RB-IOS (i.e. non-maintainable complaints) and complaints resolved as per the provisions of the clause 14(8)(a) to 14(8)(c) of the RB-IOS (i.e. complaint resolved / withdrawn). Which entities are covered under the RB-IOS? RB-IOS shall be applicable to the following Regulated Entities (REs) – Commercial Banks Regional Rural Banks  State Co-operative Banks Central Co-operative Bank...
Post a Comment
Read more

Modified Interest Subvention Scheme for Agricultural Loans

Reserve Bank of India (RBI) has published the modified interest subvention scheme (MISS) for short term loans for agriculture and allied activities availed through Kisan Credit Card (KCC) during the financial year 2025-26. Which loans are covered under modified interest subvention scheme (MISS)? The short-term crop loans and short-term loans for allied activities including animal husbandry, dairy, fisheries, bee keeping etc. up to an overall limit of ₹3 lakh to farmers through KCC during the year 2025-26 will be covered for interest subvention. Which lending institutions are covered under MISS? The MISS is applicable to the lending institutions viz. Public Sector Banks (PSBs) and Private Sector Banks (in respect of loans given by their rural and semi-urban branches only), Small Finance Banks (SFBs) and computerized Primary Agriculture Cooperative Societies (PACS) ceded with Scheduled Commercial Banks (SCBs), on use of their own resources.  How much is the interest subvention? The a...
Post a Comment
Read more

Financial Literacy Week (FLW) 2026

Reserve Bank of India (RBI) has observed financial literacy week from February 09 to 13, 2026. Financial Literacy and Financial Education Organization for Economic Co-operation & Development (OECD) defines ‘financial literacy’ as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being.  OECD defines ‘financial education’ as the process by which financial consumers / investors improve their understanding of financial products, concepts and risks and through information, instruction and / or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help and to take other effective actions to improve their financial well-being. Financial Literacy Week (FLW) Reserve Bank of India (RBI) has been observing Financial Literacy Week (FLW) every year since 2016 to p...
Post a Comment
Read more

Internal Ombudsman for Regulated Entities (Banks, NBFCs, PPI Issuers and CICs)

Reserve Bank of India (RBI) has issued directions on Internal Ombudsman for regulated entities. To whom shall the directions on Internal Ombudsman (IO) be applicable? The directions on IO shall be applicable to the following Regulated Entities (REs) – Commercial Banks (other than Small Finance Banks, Payment Banks, and Local Area Banks) having 10 or more banking outlets in India as on March 31, 2025, whether such bank is incorporated in / outside India Small Finance Banks having 10 or more banking outlets in India as on March 31, 2025 Payments Banks having 10 or more banking outlets in India as on March 31, 2025 Non-Banking Financial Companies (NBFCs) fulfilling the following criteria as on March 31, 2025 – Deposit-taking NBFCs (NBFCs-D) with 10 or more branches Non-Deposit taking NBFCs (NBFCs-ND) with asset size of ₹5,000 crore and above and having public customer interface Non-Bank Prepaid Payment Instruments Issuers having more than 1 crore Prepaid Payment Instruments (PPIs) outstan...
Post a Comment
Read more

What is Reserve Bank of India – Digital Payments Index (RBI-DPI)? (Updated on February 12, 2026)

There have been continuous efforts by various stakeholders for digitization of payments in the country. But how to we measure the impact of these efforts?  What is Reserve Bank of India – Digital Payments Index (RBI-DPI)? Reserve Bank of India (RBI) has constructed a composite Digital Payments Index (DPI) to capture the extent of digitization of payments across the country. What are the parameters of RBI-DPI? The RBI-DPI comprises of five broad parameters that enable measurement of deepening and penetration of digital payments in the country over different time periods. These parameters along with their weights in the RBI-DPI are as follows –  Payment Enablers (25%) Payment Infrastructure – Demand-side factors (10%) Payment Infrastructure – Supply-side factors (15%) Payment Performance (45%) Consumer Centricity (5%).  Each of these parameters have sub-parameters which, in turn, consist of various measurable indicators.  What is the base year for RBI-DPI? The RBI-DPI ...
Post a Comment
Read more