The Reserve Bank of India (“RBI”), vide notification dated July 1, 2015, had issued a master circular bearing reference number DBR.BP.BC.No.5/21.04.172/2015-16, consolidating the instructions on ‘Bank Finance to Non-Banking Financial Companies (“NBFC”)’, issued up to June 30, 2015 (“2015 Master Circular”). Subsequently, vide notification dated January 5, 2022, RBI has issued another master circular bearing reference number DOR.CRE.REC.No.77/21.04.172/2021-22, consolidating the instructions on ‘Bank Finance to NBFCs’, issued up to January 4, 2022 (“Master Circular”).
A brief overview of the key changes brought about in the Master Circular is as follows:
1. Inclusion of housing finance companies (“HFCs”)
The definition of NBFC, as captured in the Master Circular, specifically includes HFCs, thus making the guidelines comprised in the Master Circular, applicable to HFCs as well. Accordingly, the usage of the term “NBFC (s)” in this update, in relation to the guidelines forming a part of the Master Circular shall mean to also include HFCs. It is pertinent to note that HFCs were not included in the definition of NBFC, as captured in the 2015 Master Circular.
2. Bank finance to NBFCs (including HFCs) registered with RBI
The permission that was granted to banks to 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, under the 2015 Master Circular continues to be subjected to the following restrictions:
a) Banks are not permitted to invest in zero coupon bonds issued by NBFCs unless the issuer builds a sinking fund for all accrued interest and keeps it invested in liquid investments/ securities (government bonds); and
b) Banks are permitted to invest in non-convertible debentures with original or initial maturity up to 1 (one) year issued by NBFCs, provided that the banks adhere to extant prudential guidelines, ensure that the issuer has disclosed the purpose for which NCDs are being issued and that such purpose is eligible for bank finance.
3. Bank Finance to NBFCs which are not required to be registered with RBI
Under the 2015 Master Circular, banks were permitted to 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. while providing finance to insurance companies registered under Section 3 of the Insurance Act, 1938, Nidhi companies, Chit fund companies, stock broking companies/ merchant banking companies and housing finance companies.
Under the Master Circular, banks are allowed to take their credit decisions on similar factors while providing finance to NBFCs exempt under Master Direction - Exemptions from the provisions of RBI Act, 1934 dated August 25, 2016, which includes all kinds of entities specified under the 2015 Master Circular (except insurance companies) along with micro finance companies, securitization and reconstruction companies and mutual benefit companies and mortgage guarantee companies.
4. Eligibility of factoring companies
Under the 2015 Master Circular, in order to be eligible for bank financing, factoring companies needed to derive at least 75% (seventy five percent) of their income from factoring activities and their receivables purchased/ financed needed to form at least 75% (seventy five percent) of their assets. Under the Master Circular, factoring companies now only need to derive 50% (fifty percent) of their income from factoring activities and need only 50% (fifty percent) of their assets to be receivables purchased/financed.
5. Permission to provide partial credit enhancement to bonds
The Master Circular permits banks to provide partial credit enhancement to bonds issued by Systematically Important Non-Deposit taking NBFCs and HFCs. It is pertinent to note that no such permission was granted to banks under the 2015 Master Circular.
6. Banks’ exposure to NBFCs
The Master Circular states that the definition and method of computation of the prudential ceiling for exposure of banks to NBFCs (including HFCs) shall be as prescribed in the circular on Large Exposures Framework dated June 3, 2019. Further, it is imperative to note that under the 2015 Master Circular, the exposure of a bank to a single NBFC/ NBFC- AFC (Asset Financing Companies) (excluding gold loan companies) was limited to 10% (ten percent)/ 15% (ten to fifteen percent) respectively of their capital funds. This limit on exposures could be extended to 15% (fifteen percent)/ 20% (twenty percent) provided such exposures were undertaken on account of funds on-lent by the NBFC/ NBFC-AFC to the infrastructure sector. The Master Circular has now limited such exposures to 20% (twenty percent) of banks’ capital funds for all NBFCs (excluding gold loan companies) and introduced a limit on the banks’ exposures to group of connected NBFCs or group of connected counterparties having NBFCs in the group at 25% (twenty five percent) of their capital funds.
Please find a copy of the Master Circular, here and the 2015 Master Circular, here.
This update has been contributed by Nidhi Arya (Partner), Arjun Gopalakrishnan (Senior Associate, Designate) and Vansh Aggarwal (Associate).
Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.
7A, 7th Floor, Tower C, Max House,
Okhla Industrial Area, Phase 3,
New Delhi – 110020
+91 11 23701284/5/7
The rules of the Bar Council of India do not permit advocates to solicit work or advertise in any manner. This website has been created only for informational purposes and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work in any manner. By clicking on 'Agree' below, you acknowledge and confirm the following:
a) there has been no solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
b) you are desirous of obtaining further information about us on your own accord and for your use;
c) no information or material provided on this website is to be construed as a legal opinion and use of this website will not create any lawyer-client relationship;
d) while reasonable care has been taken in ensuring the accuracy of the contents of the website, Argus Partners shall not be responsible for the results of any actions taken on the basis of information provided in this website or for any error or omission in the website; and
e) in cases where the user has any legal issues, the user must seek independent legal advice.