Guaranteeing The Future: RBI’s Overhaul Of Non-Fund Based Credit Facilities
The Reserve Bank of India (RBI) has introduced the Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025[1], which will come into effect from April 1, 2026. These comprehensive guidelines aim to modernize and standardize the regulatory framework governing non-fund based (NFB) credit facilities such as guarantees, letters of credit, and co-acceptances issued by regulated entities (REs). This reform is designed to enhance transparency, improve governance, and ensure robust risk management in India’s credit market.
Coverage and Applicability
The Directions apply to all commercial banks (including regional rural banks), urban and state cooperative banks, all-India financial institutions, and Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs) categorized in the Middle Layer and above. However, NBFCs and HFCs are only permitted to issue Partial Credit Enhancements (PCEs) under the new regime. Existing facilities will continue under current regulations until renewal unless entities adopt the new framework earlier as per internal policies.
Core Regulatory Principles
The Directions emphasize that NFB facilities should primarily be extended to customers who already have fund-based limits, barring a few well-defined exceptions. There is a strong regulatory push for sound credit appraisals, internal exposure ceilings, detailed record maintenance, and periodic internal audits. All guarantees must be irrevocable and unconditional, and must be honoured immediately upon invocation, unless stayed by a court order.
Electronic Guarantees and Operational Controls
Recognizing the rising importance of digital infrastructure, the RBI mandates that REs implement Standard Operating Procedures (SOPs) for electronic guarantees, with focus on system integration, data security, segregation of duties, and audit trails. Institutions must integrate with electronic guarantee service providers, conduct regular system reviews, and undertake penetration testing to mitigate operational risks.
Modernized Framework for Partial Credit Enhancements
The Directions allow scheduled commercial banks, financial institutions, and eligible NBFCs/HFCs to provide PCEs to bonds issued for project financing, including by municipal bodies. These enhancements are capped at 50% of the bond size and must improve the credit rating of the bond. Facilities must include clear legal documentation, transparent credit rating disclosures, escrow arrangements, and strict exposure limits to safeguard financial stability.
Enhanced Disclosure & Simplified Regulation
To improve transparency, REs is required to make uniform annual disclosures outlining both secured and unsecured NFB exposures. Additionally, the Directions repeal several older RBI circulars, streamlining compliance and creating a cohesive regulatory environment for credit operations.
Conclusion
The conclusion of the RBI’s Non-Fund Based Credit Facilities Directions, 2025 highlights the regulator’s intent to strengthen the overall framework governing non-fund-based credit instruments in India. By introducing uniform rules, enhancing transparency, and mandating strong risk management and operational controls, the RBI aims to ensure that such facilities are used prudently and responsibly. The Directions also support the growing need for infrastructure and corporate financing by allowing modern instruments like Partial Credit Enhancements under strict guidelines. Overall, these measures are designed to promote financial stability, improve governance across regulated entities, and align India’s credit infrastructure with global best practices.
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