RBI Master Direction 2025: Non-Fund Based Credit Facilities

Key Overview

The Reserve Bank of India (RBI) has issued comprehensive guidelines for Non-Fund Based (NFB) Credit Facilities to harmonize regulations across banks and financial institutions. These directions become effective from April 1, 2026, covering facilities like guarantees, letters of credit, and co-acceptances.

Who Does This Apply To?

Regulated Entities (REs) include:

• Commercial Banks (including Regional Rural Banks and Local Area Banks)
• Primary Urban Co-operative Banks, State Co-operative Banks, Central Co-operative Banks
• All India Financial Institutions (AIFIs)
• NBFCs and Housing Finance Companies (Middle Layer and above) – only for Partial Credit Enhancement

What Are Non-Fund Based Facilities?

NFB facilities are financial instruments that don’t involve immediate fund disbursementbut create contingent liabilities. The main types are:

• Guarantees: Promise to pay if the primary borrower defaults
• Letters of Credit: Payment assurance for trade transactions
• Co-acceptances: Undertaking to pay bills if the buyer fails
• Partial Credit Enhancement (PCE): Credit support for corporate bonds

General Conditions

• Banks can only issue NFB facilities to existing customers with funded credit facilities
• Exceptions exist for derivatives, PCE, counter-guarantees, and fully secured facilities
• Banks cannot guarantee fund redemption for deposits or bond issues unless specifically permitted

Guarantee Rules

• Must be irrevocable, unconditional, and incontrovertible
• Clear payment mechanism without delays when invoked
• Volume limits: UCBs, RRBs, LABs limited to 5% of total assets for guarantees, 1.25% for unsecured guarantees
• Banks must honor guarantees immediately when invoked unless court-ordered otherwise

Co-acceptance Guidelines

• Only genuine trade bills can be co-accepted
• Must verify actual receipt of goods in borrower’s stock
• Cannot co-accept bills from other banks or funded transactions

Partial Credit Enhancement (PCE) – Key Innovation

PCE allows banks to enhance corporate bond ratings by providing contingent credit support:

Eligible Bonds

• Corporate/SPV bonds for all project types
• NBFC bonds (₹1,000 crore+ asset size)
• Municipal Corporation bonds
• Minimum “BBB-” rating required before enhancement

PCE Limits & Features

• Maximum 50% of bond size per bank
• Aggregate 50% limit across all providing banks
• Subordinated facility – drawn only when cash flows are insufficient
• 30-day repayment requirement for drawn amounts
• Banks’ aggregate PCE exposure capped at 20% of Tier 1 capital

Capital Requirements

• Capital based on pre-enhanced rating and PCE amount
• Example: ₹20 PCE on BBB-rated bond requires ₹1.8 capital (assuming 9% CRAR)
• Floor provision: Capital cannot fall below issuance-time requirement

Electronic Guarantees

• Robust operational controls required including maker-checker systems
• System integration with Core Banking Systems mandatory
• Audit trail maintenance and access controls essential

Exposure Limits

• PCE exposures within overall regulatory limits
• Special limits for NBFC/HFC bonds: 1% of bank’s capital funds
• Single counterparty limits apply to all NFB facilities

Disclosure Requirements

Banks must disclose NFB facilities in prescribed format showing:

• Outstanding guarantees (India and overseas)
• Acceptances and endorsements
• Other NFB facilities
• Secured vs unsecured portions separately

Implementation Timeline

• Effective Date: April 1, 2026 (or earlier per bank policy)
• New/renewed facilities after effective date follow new rules
• Existing facilities continue under old rules until renewal
• Transition period: UCBs, RRBs, LABs have until April 1, 2027 to meet volume limits

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