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Introduction
The Reserve Bank of India (“RBI”), exercising the powers granted by the Banking Regulation Act, 19491, RBI Act, 19342 and the National Housing Bank Act, 19343, and in the public interest, issued the new Non-Fund-Based (“NFB”) Credit Facilities Directions, 2025 (“NFC Directions”). These NFC Directions represent a landmark reform in the management of credit guarantees, letters of credit, and co-acceptances. The resultant overhaul aims to bring consistency, transparency, and robust risk management to India's financial ecosystem, offering a unified approach that benefits both Regulated Entities (“RE”) and the broader market. The effective date is April 01, 2026, or earlier if a RE chooses so, as per its policy. The new/renewed facilities must comply with the new rules, while legacy arrangements remain grandfathered until renewal.
These NFC Directions don't just upgrade existing compliance, but they are engineered to foster investor trust, fortify India's credit ecosystem, and accelerate infrastructure growth. With sector-wide impact for bankers, FinTechs, borrowers and legal professionals, the RBI has signalled a new era of prudent innovation in India's financial sector. The entity receiving the NFB facility is known as the beneficiary, the entity issuing the guarantee is known as the guarantor4, the party whose liability is backed is known as the Obligor, and the part of the facility covered by tangible security and collateral is known as the secured portion. The NFC Directions clearly define these roles and set parameters for issuance, limits, controls, credit appraisal, monitoring and security.
Following are the key highlights of the NFC Directions:
- Unified Rulebook: For the first time, a harmonised standard covers commercial banks (including Co-operative Banks and Regional Rural Banks), All India Financial Institutions, Non-Banking Financial Companies and Housing Finance Companies, remedying decades of regulatory patchwork.
- Stricter Risk Controls: All regulated entities must adopt rigorous internal credit policies for issuance of non-fund-based facilities, from robust credit appraisal to advanced fraud prevention and real-time post-sanction monitoring.
- Electronic Guarantees Revolutionised: The Directions set the stage for fully digitised, auditable guarantee platforms, with strict standard operating procedures, system integration mandates, and new operational risk controls.
- Crystal Clear Compliance: Honouring invoked guarantees without tighter asset ceilings for guarantees, demur, and enhanced disclosure requirements strengthens both market confidence and discipline.
- Seamless Transition: All new and renewed facilities, post April 01, 2026, must comply with the new framework, while all existing arrangements are grandfathered until renewal.
Why NFB Facilities Matter
NFB credit facilities are vital instruments in financial intermediation. Unlike direct loans, these facilities, including guarantees, letters of credit, and co-acceptances, do not involve a cash outflow at inception, but provide essential assurance and support for trade, infrastructure, and business expansion. They enable banks and financial institutions to back obligations, facilitate seamless transactions, and help corporates access cheaper capital in capital markets through credit enhancement.
The Big Shift: Harmonisation and Applicability
Previously, NFB guidelines were fragmented, varying across banks, Non-Banking Finance Companies (“NBFCs”), and cooperative institutions. The new NFC Directions harmonise standards across commercial banks, regional rural banks, urban and state cooperative banks, All-India Financial Institutions, and eligible NBFCs and Housing Finance Companies (“HFCs”). The result includes uniform credit policies, easier compliance, and a more resilient financial system.
General Conditions: Risk Management and Discipline
Banks and other REs must now maintain detailed credit policies covering the types and amounts of NFB facilities, rigorous credit appraisal, security norms, fraud prevention, and post-sanction monitoring. Internal controls, audit trails and compliance with international standards (such as Basel III capital regulations5) are mandatory. Generally, NFB facilities may be issued only for customers who also maintain a funded credit relationship, with well-defined exceptions including counter-guarantees6, fully secured transactions, and specific cases based on No Objection Certificates (“NOCs”) from fund-lending RE.
Issuance and Honour: The New Regulatory Mantra
All guarantees must be irrevocable and unconditional, ensuring prompt payment when invoked, barring a court stay. Strict ceilings on aggregate guarantees, especially unsecured ones, for cooperative and rural banks, with transition periods for compliance. Electronic guarantees get a major upgrade with standard operating procedures, integration of IT systems, and enhanced audit and risk controls.
Partial Credit Enhancement7: Supercharging Infrastructure Finance
Perhaps the most headline-stealing innovation is Partial Credit Enhancement (“PCE”). Under these NFC Directions, regulated entities can provide PCE to bonds issued by corporates, Special Purpose Vehicles (“SPVs”), NBFCs, HFCs, and municipal corporations8. This facility enables higher credit ratings for corporate bonds9, unlocking lower-cost capital and broader investor participation. The facility is strictly documented, irrevocable, and available only to bonds with pre-enhanced ratings not lower than BBB minus. Also, they have exposure limits, as a single RE or all REs together can provide PCE up to 50% of the bond issue size. Though there are caps by capital and exposure for risk management, it mandates ring-fencing of project assets and cash flows via escrow accounts, trustee arrangements, and transparent sharing mechanisms.
Compliance, Disclosures, and Enforcement
Under the NFC Directions, the REs now face heightened compliance obligations, including maintenance of records, regular audits, and extensive disclosures at year-end to improve market transparency. Non-compliance invites enforcement measures, including reclassification of exposures as non-performing assets, if repayments lapse.
What's Out and What's In
The Directions repeal a broad suite of dated circulars (some going back to the 1960s), consolidating decades of regulatory evolution into a single, modern framework. The existing facilities that had been extended before the effective date will continue under the old regime, but all new deals and renewals must meet the new standards as prescribed under the NFC Directions.
Industry Impact and Reactions
The financial sector has largely welcomed the Directions, acknowledging that better harmonisation and risk controls will foster greater stability and consistency. Infrastructure players expect to benefit from easier access to capital via PCE, while banks gain clarity on exposures and credit policies. Cooperative and rural banks face stricter discipline, but also more opportunities for trade financing. Further, small and mid-sized NBFCs must adapt, with eligibility for PCE restricted to those meeting asset size thresholds. Governance, due diligence, and monitoring of end-use of funds are in sharper focus than ever.
Making It Work: The Road Ahead
With the new NFC Directions becoming mandatory from April 2026, REs must review and overhaul internal policies, train staff, update Information Technology (“IT”) systems, and engage with clients to ensure a smooth transition. Credit customers and bond issuers should also prepare for stricter appraisal, documentation, and transparency norms. For legal professionals, compliance experts, and business consultants, the NFC Directions herald new opportunities for advisory, enforcement, and strategic planning. Vigilance, customisation of credit frameworks, and early adaptation will be the keys to competitive advantage. The RBI's NFC Directions are more than regulatory housekeeping; they signal India's commitment to world-class banking standards, smarter risk management, and a future-ready credit market. Entities that embrace these changes with vision and agility stand to benefit from enhanced credibility, improved capital access, and lasting financial resilience.
Footnotes
1. Section 21, 35A & 56 of the Banking Regulation Act, 1949.
2. Section 45JA, 45L & 45M of the Reserve Bank of India Act, 1934.
3. Section 30A, 32 & 33 of the National Housing Bank Act, 1987.
4. Section 126 of the Indian Contract Act, 1872.
5. Master Circular, Basel III Capital Regulations, April 01, 2025.
6. Clause 15 of the RBI NFC Direction, 2025.
7. Clause 23 of the RBI NFC Directions, 2025.
8. Para 2.3.7.3(iii) of Master Circular, Loans and Advances – Statutory & other Restriction, July 01, 2015.
9. Annex 1 of the Prudential Framework for Resolution of Stressed Assets, June 7, 2019.
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