Master Circular - Bank Finance to Non-Banking Financial Companies (NBFCs)

भारतीय �रज़व� ब�क RESERVE BANK OF INDIA RBI/2024-25/24 DOR.CRE.REC.No.17/21.04.172/2024-25 April 24, 2024 All Scheduled Commercial Banks (excluding RRBs) Madam/ Dear Sir, Master Circular - Bank Finance to Non-Banking Financial Companies (NBFCs) Please refer to our Master Circular DOR.CRE.REC.No.07/21.04.172/2023-24 dated April 03, 2023 on the captioned subject. Attached is the revised Master Circular, updated to reflect all instructions issued as on date on the above matter, as listed in the Appendix. It may be noted that this Master Circular only consolidates all instructions on the above matter issued up to April 23, 2024 and does not contain any new instructions/guidelines. Yours faithfully, (Vaibhav Chaturvedi) Chief General Manager Encl: as above.Master Circular on Bank Finance to Non-Banking Financial Companies (NBFCs) Purpose To lay down the Reserve Bank of India's regulatory policy regarding financing of NBFCs by banks. Classification A statutory guideline issued under Section 35A of Banking Regulation Act, 1949. Previous guidelines Master Circular DOR.CRE.REC.No.07/21.04.172/2023-24 dated April 03, 2023 on ‘Bank Finance to Non-Banking Financial Companies (NBFCs). Application To all Scheduled Commercial Banks (excluding Regional Rural Banks). 2 DOR – MC – Bank Finance to NBFCs, 2024Structure 1. Introduction 1.1 Terminology 1.2 Background 2. Bank Finance to NBFCs Registered with RBI 3. Bank Finance to NBFCs not Requiring Registration 4. Activities not Eligible for Bank Credit 5. Bank Finance to Factoring Companies 6. Other Prohibition on Bank Finance to NBFCs 6.1 Bridge loans / interim finance 6.2 Advances against collateral security of shares to NBFCs 6.3 Restriction on guarantees for placement of funds with NBFCs 7. Prudential Ceilings for Exposure of Banks to NBFCs 8. Restrictions Regarding Investments Made by Banks in Securities / Instruments Issued by NBFCs 9. Risk Weight for Bank credit to NBFCs Appendix 3 DOR – MC – Bank Finance to NBFCs, 20241. Introduction Reserve Bank of India has been regulating the financial activities of the Non-Banking Financial Companies under the provisions of Chapter III B of the Reserve Bank of India Act, 1934. With the amendment of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45 IA of the said Act, and amendment of the National Housing Bank Act, 1987 in August 2019, in terms of Section 29 A of the National Housing Bank Act, 1987, all Non-Banking Financial Companies including Housing Finance Companies have to be mandatorily registered with the Reserve Bank of India. 1.1 Terminology a. 'NBFCs' means the Non-Banking Financial Companies registered with the Reserve Bank of India, which shall also include Housing Finance Company (HFC) registered under Section 29 A of the National Housing Bank Act, 1987. b. 'Current investments' means the investments classified in the balance sheet of the borrower as 'current assets' and are intended to be held for less than one year. c. 'Long term investments' means all types of investments other than that classified as 'current assets'. d. 'Unsecured loans' means the loans not secured by any tangible asset. 1.2 Background The credit related matters of banks have been progressively deregulated by Reserve Bank of India. Consistent with the policy of bestowing greater operational freedom to banks in the matter of credit dispensation and in the context of mandatory registration of NBFCs with the Reserve Bank, most of the aspects relating to financing of NBFCs by banks have also been deregulated. However, in view of the sensitivities attached to financing of certain types of activities undertaken by NBFCs, restrictions on financing of such activities continue to be in force. 2. Bank Finance to NBFCs registered with RBI 2.1 The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs has been withdrawn in respect of all NBFCs which are statutorily registered with RBI and are 4 DOR – MC – Bank Finance to NBFCs, 2024engaged in principal business of asset financing, loan, factoring and investment activities. Accordingly, banks may extend need based working capital facilities as well as term loans to all NBFCs registered with RBI and engaged in infrastructure financing, equipment leasing, hire-purchase, loan, factoring and investment activities subject to provisions of para 8 of these guidelines. 2.2 In the light of the experience gained by NBFCs in financing second hand assets, banks may also extend finance to NBFCs against second hand assets financed by them. 2.3 Banks may formulate suitable loan policy with the approval of their Boards of Directors within the prudential guidelines and exposure norms prescribed by the Reserve Bank to extend various kinds of credit facilities to NBFCs subject to the condition that the activities indicated in paragraphs 4 and 6 are not financed by them. 3. Bank Finance to NBFCs not requiring Registration1 In terms of “Master Direction - Exemptions from the provisions of RBI Act, 1934” dated August 25, 2016, as updated from time to time, few categories of non-banking financial companies are exempted from certain provisions of the Reserve Bank of India Act, 1934 (the RBI Act, 1934), including the need for registration with the Reserve Bank. For such NBFCs not needing registration with the Reserve Bank, banks may take their credit decisions on the basis of usual factors like the purpose of credit, nature and quality of underlying assets, repayment capacity of borrowers as also risk perception, etc. 4. Activities not eligible for Bank Credit 4.1 The following activities undertaken by NBFCs, are not eligible for bank credit: (i) Bills discounted / rediscounted by NBFCs, except for rediscounting of bills discounted by NBFCs arising from sale of - (a) commercial vehicles (including light commercial vehicles), and (b) two wheeler and three wheeler vehicles, subject to the following conditions : 1 While financing NBFCs, which do not require registration with RBI, banks should also refer to the guidelines / notifications issued in this regard from time to time by the Ministry of Corporate Affairs, Government of India. 5 DOR – MC – Bank Finance to NBFCs, 2024• the bills should have been drawn by the manufacturer on dealers only; • the bills should represent genuine sale transactions as may be ascertained from the chassis / engine number; and • before rediscounting the bills, banks should satisfy themselves about the bona fides and track record of NBFCs which have discounted the bills. (ii) Investments of NBFCs both of current and long-term nature, in any company / entity by way of shares, debentures, etc. However, Stock Broking Companies may be provided need-based credit against shares and debentures held by them as stock-in- trade. (iii) Unsecured loans / inter-corporate deposits by NBFCs to / in any company. (iv) All types of loans and advances by NBFCs to their subsidiaries, group companies / entities. (v) Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs) and for purchase of shares from secondary market. 4.2 Leased and Sub-Leased Assets As banks can extend financial assistance to equipment leasing companies, they should not enter into lease agreements departmentally with such companies as well as other Non-Banking Financial Companies engaged in equipment leasing. 5. Bank Finance to Factoring Companies 5.1 Notwithstanding the restrictions mentioned at Paragraph 4.1 (i) and 4.1 (iii) above, banks can extend financial assistance to support the factoring business of Factoring Companies, viz., ‘NBFC-Factors’ and ‘NBFC-ICCs holding certificate of registration under the Factoring Regulation Act, 2011’. To be eligible for bank finance, following criteria must be satisfied by the Factoring Companies - (a) The companies qualify as factoring companies; and carry out their business under the provisions of the Factoring Regulation Act, 2011 and Notifications issued by the Reserve Bank in this regard from time to time. (b) The financial assistance extended by the Factoring Companies is secured by hypothecation or assignment of receivables in their favour. 6 DOR – MC – Bank Finance to NBFCs, 20245.2 In addition to the above, NBFC-Factors must also satisfy the following criteria to be eligible for bank finance - (i) They derive at least 50 per cent of their income from factoring activity. (ii) The receivables purchased / financed, irrespective of whether on 'with recourse' or 'without recourse' basis, form at least 50 per cent of their assets. (iii) The assets/ income referred to at (i) and (ii) above would not include the assets/ income relating to any bill discounting facility extended by them. 6. Other Prohibitions on Bank Finance to NBFCs 6.1 Bridge loans / interim finance Banks should not grant bridge loans of any nature, or interim finance against capital / debenture issues and / or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of Non-Banking Financial Companies. Banks should strictly follow these instructions and ensure that they are not circumvented in any manner whatsoever by purport and / or intent by sanction of credit under a different nomenclature like unsecured negotiable notes, floating rate interest bonds, etc., as also short-term loans, the repayment of which is proposed / expected to be made out of funds to be or likely to be mobilised from external / other sources and not out of the surplus generated by the use of the asset(s). 6.2 Advances against collateral security of shares to NBFCs Shares and debentures cannot be accepted as collateral securities for secured loans granted to NBFC borrowers for any purpose. 6.3 Restriction on guarantees for placement of funds with NBFCs Banks shall comply with the instructions as provided under paragraph 2.4 of Master Circular - Guarantees and Co-acceptances dated April 01, 2024, as updated from time to time, regarding restrictions on issuing guarantees for placement of funds with NBFCs or other non-bank entities. 7 DOR – MC – Bank Finance to NBFCs, 20247. Prudential ceilings for exposure of banks to NBFCs 7.1 The definition and method of computation of exposure would be as prescribed in the circular on Large Exposures Framework dated June 03, 2019 and amendments made from time to time. 7.2 Banks’ exposures to a single NBFC (excluding gold loan companies) will be restricted to 20 percent of their eligible capital base (Tier I capital). However, based on the risk perception, more stringent exposure limits in respect of certain categories of NBFCs may be considered by banks. Banks’ exposures to a group of connected NBFCs or group of connected counterparties having NBFCs in the group will be restricted to 25 percent of their Tier I Capital as detailed in circular on Large Exposures Framework dated June 03, 2019 read with circular on Large Exposures Framework dated September 12, 2019. 7.3 The exposure of a bank to a single NBFC which is predominantly engaged in lending against collateral of gold jewellery (i.e. such loans comprising 50 per cent or more of their financial assets), shall not exceed 7.5 per cent of the bank’s capital funds (Tier I plus Tier II Capital). However, this exposure ceiling may go up by 5 per cent, i.e., up to 12.5 per cent of banks’ capital funds if the additional exposure is on account of funds on-lent by such NBFCs to the infrastructure sector as detailed in circular on Bank Finance to NBFCs Predominantly Engaged in lending against Gold dated May 18, 2012. 7.4 Banks may also consider fixing internal limits for their aggregate exposure to all NBFCs put together. 7.5 Banks should have an internal sub-limit on their aggregate exposures to all NBFCs, having gold loans to the extent of 50 per cent or more of their total financial assets, taken together. This sub-limit should be within the internal limit, where fixed by the banks for their aggregate exposure to all NBFCs put together as prescribed in paragraph 7.4 above. 7.6 Infusion of eligible capital funds after the published balance sheet date may also be taken into account for the purpose of computing exposure ceiling. Banks should obtain an external auditor's certificate on completion of the augmentation of capital 8 DOR – MC – Bank Finance to NBFCs, 2024and submit the same to the Reserve Bank of India (Department of Supervision) before reckoning the additions to capital funds. 7.7. Banks shall adhere to the intra-group limits in accordance with Guidelines on Management of Intra-Group Transactions and Exposures dated February 11, 2014. 8. Restrictions regarding investments made by banks in securities / instruments issued by NBFCs Bank should follow the guidelines provided under para 30 of chapter IX “Investment in Non-SLR Securities” of Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 as updated from time to time. 9. Risk weights for bank credit to NBFCs Banks’ exposure to NBFCs shall be subject to capital charge as per the Risk Weight prescribed in paragraph 5 of Master Circular DOR.CAP.REC.4/21.06.201/2024-25 dated April 01, 2024, as updated from time to time. 9 DOR – MC – Bank Finance to NBFCs, 2024Appendix List of Circulars Consolidated in the Master Circular Sl No. Circular No Date Subject 1. DBOD.No.FSC.BC.71/C.46 22.01.1992 Restriction on credit to certain sectors 9/91-92 2. IECD. No. 14/08.12.01/94- 28.09.1994 Lending to Non-Banking Financial 95 Companies 3. IECD.No.42/08.12.01/94-95 21.04.1995 Lending to Non-Banking Financial Companies 4. DBOD.No.FSC.BC.101/24. 20.09.1995 Equipment Leasing, Hire Purchase and 01.001/95-96 Factoring etc. Activities 5. IECD. No. 17/03.27.026/96- 06.12.1996 Bank Finance for Purchase/Lease of 97 Existing Assets 6. IECD.No.1 5/08.12.01/97- 04.11.1997 Guidelines for Lending by Banks - 98 Assessment of Working Capital 7. DBOD.No.Dir.BC.90/13.07. 28.08.1998 Bank Finance against Shares & 05/98-99 Debentures 8. DBOD.No.Dir.BC.107/13.07 11.11.1998 Rediscounting of Bills by Banks .05/98-99 9. IECD.No.29/08. 12.01/98- 25.05.1999 Lending to Non-Banking Financial 99 Companies (NBFCs) 10. DBOD.No.Dir.BC.173/13.07 12.05.2000 Rediscounting of Bills by Banks .05/99- 2000 11. DBOD.No.BP.BC.51/21.04. 10.11.2000 Bank Financing of Equities and 137/2000- 01 Investment in Shares 12. RBI/273/2004-05 19.11.2004 Mid-Term Review of the Annual Policy DBOD.IECS.BC.No.57/08.1 Statement for the year 2004-05 - 2.01 (N)/2004-05 Bank Finance to NBFCs 13 RBI/2006-07/205 12.12.2006 Financial Regulation of Systematically DBOD.No.FSD.BC.46/24.0 Important NBFCs and Bank’s 1.028/2006-07 Relationship with them - Final Guidelines 10 DOR – MC – Bank Finance to NBFCs, 202414. RBI/2007-08/235 12.02.2008 Bank Finance to Factoring Companies DBOD.BP.BC.No.60/08.12. 01/2007-08 15. RBI/2009-10/317 12.02.2010 Risk Weights and Exposure Norms in DBOD.No.BP.BC.74/21.04. respect of Bank Exposure to 172/2009-10 NBFCs categorised as 'Infrastructure Finance Companies' 16. RBI/2011-12/568 18.05.2012 Bank Finance to NBFCs Predominantly DBOD.BP.BC.No.106/21.04 Engaged in lending against Gold .172/2011-12 17 RBI/2012-13/199 11.09.2012 Bank Finance to Factoring Companies DBOD.BP.BC.No.40/21.04. 172/2012-13 18 RBI/2013-14/487 11.02.2014 Guidelines on Management of Intra- DBOD.No.BP.BC.96/21.06. Group Transactions and Exposures 102/2013-14 19 RBI/2015-16/247 26.11.2015 Bank Finance to Factoring Companies DBR.BP.BC.No.55/21.04.1 72/2015-16 20 RBI/2018-19/196 03.06.2019 Large Exposures Framework DBR.No.BP.BC.43/21.01.0 03/2018-19 21 RBI/2019-20/60 12.09.2019 Large Exposures Framework DBR.No.BP.BC.18/21.01.0 03/2019-20 22 Notification No. 14.01.2022 Registration of Factors (Reserve Bank) DOR.FIN.080/CGM(JPS) – Regulations, 2022 2022 23 DOR.MRG.36/21.04.141/20 12.09.2023 Master Direction - Classification, 23-24 Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 11 DOR – MC – Bank Finance to NBFCs, 202424 DOR.STR.REC.2/13.07.010 01.04.2024 Master Circular - Guarantees and Co- /2024-25 acceptances 25 DOR.CAP.REC.4/21.06.20 01.04.2024 Master Circular – Basel III Capital 1/2024-25 Regulations 12 DOR – MC – Bank Finance to NBFCs, 2024