RBI Issues Comprehensive Directions for Non-Fund Based Credit Facilities [Read Notification]

The Reserve Bank of India (RBI) has issued a major regulatory update through Notification No. RBI/DOR/2025-26/140 dated August 6, 2025, introducing the RBI (Non-Fund Based Credit Facilities) Directions, 2025.

The new guidelines consolidate, streamline, and strengthen the regulatory framework governing non-fund-based (NFB) credit instruments such as guarantees, letters of credit, co-acceptances, and partial credit enhancements (PCE).

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These directions aim to harmonize practices across all types of regulated entities (REs), including commercial banks, cooperative banks, financial institutions, and larger NBFCs/HFCs, and will take effect from April 1, 2026.

Key Features of the New Directions

Standardization of Guarantee Practices

All guarantees must now be:

• Irrevocable
• Unconditional
• Incontrovertible, with a clearly defined payment mechanism

Also, limits are imposed on unsecured guarantees, particularly for cooperative banks. For example, such guarantees cannot exceed 5% of total assets (1.25% for unsecured ones) for UCBs, RRBs, and similar entities.

Push for Electronic Guarantees

The Directions explain a shift to electronic guarantees, supported by:

• Strong IT integration with guarantee platforms
• Clearly defined SOPs for issuance, invocation, amendment, and cancellation
• Enhanced cybersecurity and internal control mechanisms (see Annex 1)

Partial Credit Enhancements (PCE)

Regulated entities such as scheduled commercial banks (excluding RRBs), select NBFCs, and AIFIs can offer PCEs to bonds issued by corporates, large NBFCs, or municipal bodies—aimed at improving credit ratings and promoting market access. Notably:

• PCEs must be irrevocable, used solely for bond servicing, and subject to strict exposure limits.
• PCE cannot exceed 50% of the bond size, and aggregate PCE by an entity is capped at 20% of its Tier 1 capital.

Rules for Co-Acceptance of Bills

Only genuine trade-related bills can be co-accepted. Banks must ensure actual receipt of goods and maintain comprehensive internal records.

Exposure and Compliance Framework

• NFB facilities must typically be issued only to customers who have existing fund-based credit with the RE, with certain exceptions (e.g., backed by other REs' counter-guarantees).
• Any NFB facility that devolves (i.e., turns into a liability) will be treated as a fund-based exposure for prudential purposes.

Disclosure Requirements

Entities must report outstanding NFB facilities, both secured and unsecured, as per a standard format (shown on page 13 of the circular).

The new Directions repeal and replace a long list of outdated circulars, specifically 78 for Scheduled Commercial Banks and 13 for Urban Cooperative Banks, as listed in Annex 2 (pages 16-20) of the circular.

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