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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


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