The Reserve Bank of India ("RBI") vide its press release dated April 9, 2025, released and invited comments from the public/ stakeholders on the draft directions ("Draft Directions"), inter alia, on the following subjects:
- Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 ("CLA Directions");
- Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025 ("NFB Directions"); and
- Reserve Bank of India (Securitisation of Stressed Assets) Directions, 2025 ("SSA Directions").
A brief overview of the Draft Directions is as follows:
CLA Directions
The CLA Directions have been formulated with a view to create a comprehensive, market-enabling framework that covers all forms of co-lending as well as address the associated prudential and consumer-protection issues by prescribing uniform norms on governance, pricing, risk sharing, disclosures and customer interface across every co-lending configuration. Following is a brief overview of the CLA Directions:
Scope
The CLA Directions will apply to all Scheduled Commercial Banks ("SCBs") (excluding Small Finance Banks ("SFBs"), Local Area Banks ("LABs") and Regional Rural Banks ("RRBs")), All India Financial Institutions ("AIFIs") and Non-Banking Financial Companies ("NBFCs"), including Housing Finance Companies ("HFCs") (collectively referred to as "REs" for the purpose of the CLA Directions).
However, digital lending arrangements (not involving co-lending by REs), engagement of Business Correspondents, loan participation transactions and peer-to-peer lending transactions already covered under other directions issued by the RBI have been excluded from the scope of the CLA Directions. Additionally, the CLA Directions will not apply to loans exceeding INR 100 crore sanctioned under multiple banking, consortium lending, or syndication.
Notably, the scope of the CLA Directions has also been extended to co-lending arrangements involving sourcing of loans by REs from other REs or non-REs, without involvement of any fund or non-fund commitments.
Key definitions
'Co-lending arrangement' ("CLA") has been defined as an arrangement, formalised through an ex-ante legal agreement, among the permitted REs to jointly fund a loan portfolio in a pre-agreed proportion, involving revenue and risk sharing with or without sourcing and management arrangement.
Further, 'sourcing arrangement' has been defined as an arrangement wherein an RE, or a non-RE sources loans (sourcing entity), in compliance with extant guidelines, for another RE (funding entity) on a fee basis i.e., without any reference to profit sharing agreement, with the exposure being entirely booked by the funding entity, ab-initio.
Governance and Documentation
Each RE's credit policies should incorporate suitable provisions relating to CLAs including, the internal limit for the proportion of their lending portfolio under CLAs, target borrower segments, due diligence of the partner entities, customer service and grievance redressal mechanisms. Additionally, the Board approved policy should lay down the objective criteria for fees and charges payable to the sourcing/ servicing entity depending upon relevant factors such as the nature of service provided, quantum of loan, etc.
The agreement to be executed in respect of CLAs should include detailed terms and conditions of the arrangement, including but not limited to the criteria for selection of borrowers, specific product lines and area of operation, fees payable, segregation of responsibilities, customer interface and customer protection issues. Further, the loan agreement with the borrower must clearly disclose the segregation of the roles and responsibilities (such as sourcing, funding, and servicing) of concerned partners, including the entity having customer interface (which can be changed only with the consent of the borrower), suitable provisions related to customer protection, and grievance redress mechanism.
Pricing and fees
The interest rate payable by the borrower should be a blended rate, i.e. the weighted-average of each lending RE's own rate for a comparable borrower, calculated in proportion to its share of the loan.
Further, the fees/ charges payable to the sourcing/ servicing entity will be outside the blended rate as mentioned above and should not involve directly/ indirectly, any element of credit enhancement/ default loss guarantee unless specifically permitted.
Operational controls
All transactions between the REs and with the borrower should be routed through an escrow account, however, in respect of sourcing arrangements, all loan servicing shall be done by the borrower directly in the RE's bank account, without any pass-through account/ pool account of any third party.
Every loan must be split amongst the lending REs from the first disbursement pursuant to an ex-ante inter-creditor agreement with joint nature of rights.
REs are mandated to implement a business continuity plan to ensure uninterrupted service to their borrowers, in the event of termination of the CLA. Borrower complaints are required to be resolved within 30 days, after which unresolved cases can be escalated to the RBI's Complaint Management System/ Centralised Receipt and Processing Centre against the relevant RE(s).
Default Loss Guarantee
REs, involved in a CLA either as a sourcing or funding entity, have been permitted to provide default loss guarantee ("DLG") up to 5% of the outstanding loan portfolio under CLA or sourcing arrangements. Such DLGs will be governed by RBI's earlier 'Guidelines on Default Loss Guarantee (DLG) in Digital Lending' issued on June 8, 2023. Further, the RBI has also clarified that REs or non-REs shall not be permitted to provide DLG in any other form.
Disclosures
REs are required to display on their website their CLA partners and the indicative range of blended rates and borrower charges for each arrangement. Further, REs are also required to disclose in their quarterly financials the details regarding the quantum of CLAs, weighted average interest rates, fees paid/received, sector mix, loan performance, and DLGs.
NFB Directions
The NFB Directions aim to create a consolidated and comprehensive regime for guarantees, letters of credit, co-acceptances and partial credit enhancements that applies uniformly to all regulated entities. Following is a brief overview of the NFB Directions:
Scope
The NFB Directions will be applicable to all SCB (including RRBs and LABs), Primary (Urban) Co-Operative Banks ("UCBs"), State Co-operative Banks ("StCBs"), Central Co-operative Banks ("CCBs"), AIFIs, and all NBFCs including HFCs (collectively referred to as "REs" for the purpose of the NFB Directions) for all their non-fund-based ("NFB") facilities. However, derivative exposures are excluded from the scope of the NFB Directions except for the general conditions which have been laid down.
General Conditions for all NFB facilities
NFB facilities can only be issued on behalf of a customer having a business relationship with the REs, except in respect of derivatives entered into by REs with counterparties. Further, no NFB facility should be issued by an RE unless their credit policy contains specific enabling provisions, with detailed guidelines in this regard. The NFB Directions also specify that the credit appraisal of an NFB facility should be similar in rigour to a funded facility.
Guarantees
A guarantee or a counter-guarantee issued by an RE must be irrevocable and unconditional and should also contain a clear mechanism for honouring the same without demur on invocation. Further, REs are expected to avoid undue concentration of unsecured guarantees and put in place suitable internal aggregate/individual ceilings for issuance of unsecured guarantees.
While all NBFCs, UCBs, RRBs, StCBs and CCBs can provide financial guarantees, performance guarantees can be provided only by scheduled UCBs and NBFCs in the middle and upper layer. Further, all such guarantees shall be provided for a maximum tenor of 10 years and should be within the specified cap on the guarantee exposure for the respective REs.
The credit policy on guarantees should specifically incorporate suitable provisions on types of guarantees which can be extended, credit appraisal process, internal controls and other aspects relating to invocation and settlement mechanism etc.
The NFB Directions, while highlighting the benefits of electronic guarantee, require REs to frame a standard operating procedure in line with the prescribed requirements.
Furthermore, the NFB Directions have paved the way for NBFCs, UCBs and RRBs to provide financial guarantees, however, a restriction has been stipulated for providing performance guarantees by UCBs and NBFCs. UCBs and NBFCs in the middle and upper layer have only been authorized to issue performance guarantees. All such guarantees shall only be provided for a tenor of 10 years.
Partial Credit Enhancement
SCBs, AIFIs, NBFCs in top, upper and middles layers and HFCs ("Specified REs") can provide Partial Credit Enhancement ("PCE") facility to enhance the credit rating of bonds and to enable the corporates to access the funds from the bond market on better terms.
The Specified REs have been permitted to provide PCE in the form of irrevocable contingent line of credit, not by way of guarantee, for the bonds issued by corporates/ special purpose vehicles ("SPVs") for funding all types of projects and for the bonds issued by non-deposit taking NBFCs/ HFCs with asset size of INR 1,000 crore and above, registered with the RBI. However, the Specified REs have been restricted from investing in corporate bonds which are credit enhanced by other REs.
PCE can be offered only in respect of bonds whose pre-enhanced rating is "BBB" minus or better. Further, to be eligible for PCE, corporate bonds should be rated by a minimum of two external credit rating agencies at all times.
Disclosures
All REs are required to prepare and publish, as at 31st March of each financial year, standardised balance-sheet and maturity-ladder statements that clearly segregate the secured and unsecured portions of all guarantees, acceptances, endorsements and other contingent liabilities.
SSA Directions
The SSA Directions have been formulated with a view to give regulated entities a clear, prudentially ring-fenced route to re-package and sell pools of non-performing loans, so that recovery risk is shared with investors. Following is a brief overview of the SSA Directions:
Scope
The SSA Directions shall be applicable to all SCB (excluding RRBs), AIFIs, SFBs and all NBFCs including HFCs (collectively referred to as "REs" for the purpose of the SSA Directions).
The SSA Directions allow securitisation of pools of stressed assets where at least 90% of the total outstanding loan amount consist of non-performing assets ("NPAs"), both at the origination cut-off date and at any subsequent date when assets are added or removed from the pool due to replenishment, restructuring or any other relevant reasons.
A 'pool of stressed assets' has been defined as a portfolio of stressed loans in which the sum of the squares of each loan's relative share in the pool is equal to or less than 0.30. 'Relative share' will be calculated by dividing the outstanding amount of each loan by the total outstanding amount of the portfolio on the origination cut-off date.
The pool of stressed assets being securitised should be homogenous, i.e. loan exposures from the following two categories should not be mixed as part of the same pool:
- Personal loans sanctioned to individuals, business loans to individuals, and loans to micro enterprises, not exceeding INR 50 crore ("Small Loans").
- All other loans not covered above ("Large Loans").
Lenders are not permitted to undertake securitisation activities or assume securitisation exposures, including re-securitisation exposures, securitisation with underlying assets such as exposures to other lending institutions, education loans and accounts identified as fraud/ wilful defaulter.
Risk retention and originator limits
There is no mandatory minimum risk retention requirement ("MRR"), except where the originator also acts as a resolution manager ("ReM") in respect of the loan exposure transferred by it or where the due diligence is performed on sample basis in case of Small Loans as discussed below.
The total exposure of an originator, belonging to a particular securitisation structure or scheme, should not exceed 20% of the total securitisation exposure. However, any exposure above 10% and up to the maximum permissible limit of 20% shall be treated as first loss, for all prudential purposes, irrespective of the actual exposure being in any other tranche.
Pricing and sale mechanics
An originator can sell the assets to a special purpose entity ("SPE") only on cash basis, as per mutually determined price, and the sale consideration shall be received not later than the transfer of the assets to the SPE.
Originators are required to formulate a price discovery policy and obtain two external valuation reports before securitising a pool of assets comprising of Large Loans.
Further, SPEs are required to ensure that the investors in the securitisation notes of Large Loans should not be related parties of the borrowers or persons disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016.
Supporting facilities
While supporting facilities such as credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities can be provided in respect of securitisation of stressed assets, credit enhancement (except in form of contractual risk retention or permissible first loss default guarantee) provided by lenders should be limited to cover the losses of the senior tranche only.
The SSA Directions also envisage appointment of a ReM who shall be responsible for administering resolution/ recovery of the underlying stressed exposures. The role of the ReM is to effectively resolve the stressed assets and maximise the realization of value.
For Small Loans, the ReM must be an RBI regulated entity and the originator can also serve as the ReM if it retains atleast 5% of the total securitisation notes. For Large Loans, insolvency professionals, insolvency professional entities or any entity regulated by an Indian financial sector regulator can also be appointed as the ReM. However, a ReM cannot be a related party and shall not have any obligation to support any losses incurred by the SPE, subject to limited exceptions.
Investors in Securitisation Exposure
The SSA Directions provide that the due diligence norms specified under the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021, shall apply to securitisation of stressed assets as well. However, for Small Loans, lenders are permitted to conduct due diligence on a sample basis, provided the sample includes at least 1/3rd of the portfolio both by value and number of loans, and the originator retains a minimum of 10% of the securitisation notes issued.
Additionally, the valuation of securitisation notes must follow a linear amortisation method over the life of the notes, with a maximum period of 5 years, and these notes cannot be classified under the 'Held-to-Maturity' investment category. After the 5 year period, any remaining notes must be valued at INR 1. The provisions to be maintained by the note holders should be in proportion to the tranche-wise distribution of risk-weighted exposures.
Reporting and disclosure
Originators and SPEs are mandated to file quarterly returns with RBI providing the details of the securitisation transactions undertaken. Further, the offer documents must give the investors all materially relevant data and performance of the individual underlying exposures as well as necessary information to conduct comprehensive and well-informed stress tests on the cash flows and collateral values supporting the underlying exposures. The servicer/ ReM is required to provide the investors pool-performance reports, at least on a quarterly basis.
Concluding remarks
The Draft Directions mark a significant step towards strengthening and modernizing the regulatory framework governing CLAs, NFB facilities, and securitisation of stressed assets. Taken together, they are expected to provide greater balance-sheet flexibility while simultaneously tightening expectations around disclosure, customer protection and board-level oversight. For instance, the SSA Directions, open a path to recycle NPAs through capital-markets structures, but also cap the originators' retained exposure at 20% and specify a ReM regime to drive recoveries. The NFB Directions aim to ensure that NFB exposures are underwritten, priced, secured, and disclosed with the same discipline as funded credit, and also bring consistency across the different REs, while recognising their differing risk appetites. Similarly, the CLA Directions extend co-lending beyond bank–NBFC priority-sector deals but impose a uniform blended-rate rule and caps on DLGs. Further, by expressly repealing scores of legacy instructions, the Draft Directions also offer much-needed regulatory clarity and operational efficiency.
Comments on the Draft Directions have been sought from public/stakeholders till May 12, 2025.
The copies of the Draft Directions can be accessed here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
