The Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025 (“Directions”) were issued on August 6, 2025 by the Reserve Bank of India (“RBI”) with a view to harmonise and consolidate the guidelines on Non-fund based (“NFB”) facilities such as Guarantees, letters of credit, and co-acceptances of bills across all regulated entities of the RBI. The RBI had issued draft guidelines on April 9, 2025 for public comments, and the feedback received has been considered and incorporated in the Directions. The Directions shall come into force from April 1, 2026 or from any earlier date as decided by a RE in line with its internal policy (“Effective Date”). From the Effective Date, any new NFB facility or renewal of an existing NFB facility must comply with the Directions, while facilities sanctioned or renewed before the Effective Date will continue to be governed by the earlier framework.

Applicability

The Directions lay down comprehensive conditions governing the following entities:

1. Commercial Banks (including Regional Rural Banks and Local Area Banks);

2. Primary (Urban) Co-operative Banks/ State Co-operative Banks/ Central Co-operative Banks;

3. All India Financial Institutions; and

4. Non-Banking Financial Companies (“NBFCs”) including Housing Finance Companies (“HFCs”) in Middle Layer and above, only for the issuance of Partial Credit Enhancement (“PCE”).

For the purposes of the Directions, the above entities are collectively referred to as Regulated Entities (“REs”), and the provisions shall apply to all their NFB exposures, unless otherwise permitted under the Directions or any regulatory guidelines/ directions issued by the RBI. The definition of REs has been expanded to include All India Financial Institutions as well. Derivative exposures of REs remain outside the scope of the Directions, except for the general conditions prescribed under Chapter II.

The Directions are subject to applicable provisions under the Foreign Exchange Management Act, 2002 (“FEMA”), the Foreign Exchange Management (Guarantees) Regulations, 2000, and related RBI regulations, including exposure norms. The earlier guidelines as listed in Annex 2 of the Directions stand repealed as of the Effective Date; however, actions taken under the repealed provisions shall remain valid to the extent they are not inconsistent with the Directions. Additionally, all existing regulatory guidelines for credit and investment exposures by REs shall continue to apply unless specified otherwise in the Directions. All capitalized terms used but not defined herein, shall have the meaning given to such terms under the Directions.

Key Provisions

Guarantees

All Guarantees (or counter-guarantees) issued by REs must be irrevocable, unconditional, incontrovertible, and contain a clear mechanism for honouring payment without demur upon invocation. They must not contain provisions allowing unilateral cancellation or clauses that delay or obstruct payment if the counterparty defaults.

1. General conditions on issuance: A RE shall issue a NFB facility only on behalf of a customer having a funded credit facility with the RE, subject to certain exceptions (such as derivative contracts, PCE, counter-guarantees, facilities backed by no-objection certificates or eligible financial collateral, etc.) as provided under clause 7 of the Directions. Further, REs are prohibited from issuing any NFB facility that assures redemption or repayment of funds raised by any entity through deposits, bonds, or other instruments, unless expressly permitted under applicable RBI guidelines or directions.

2. Internal policies and ceilings: Internal policies on Guarantees must address key operational aspects related to invocation and settlement mechanism, inter alia claim period, tenor, fee/ commission/ charges, timeline for release of security, renewal, fraud prevention measures. REs are required to set internal ceilings for the issuance of Guarantees, particularly unsecured Guarantees. In the case of Urban Cooperative Banks, Regional Rural Banks, Local Area Banks, State Cooperative Banks, and Central Cooperative Banks, the total outstanding guaranteed obligations must not exceed 5% (five percent) of total assets (as per the previous year’s balance sheet), and unsecured Guarantees must be limited to 1.25% (one point two five percent) of the same. Any breach of these thresholds must be rectified by April 1, 2027.

3. Electronic Guarantees: For electronic Guarantees, REs must develop a standard operating procedure to minimise manual intervention, meet system integration requirements, ensure technological compatibility with e-Guarantee platforms, and maintain operational risk control measures in line with Annex 1 of the Directions.

4. Inter-RE Guarantees: While the earlier framework permitted banks to issue Guarantees in favour of other banks/FIs for fund-based facilities extended by them (subject to specified safeguards), the Directions reverse this position by providing a general rule prohibiting REs from issuing Guarantees that enable other REs to provide fund-based credit facilities to an Obligor (save for credit-facilities extended against Guarantees pertaining to trade-related transactions). However, REs may issue Guarantees in favour of another RE for NFB facilities. In such cases, the Guarantee is to be treated as an exposure on the underlying Obligor for the purpose of capital adequacy, while the RE extending the credit must record the exposure on the RE providing the counter-guarantee.

5. Timely payment of invoked Guarantee: A RE must honour its Guarantee when invoked as per the terms of the guarantee deed, unless restrained by a court order.

6. Co-acceptances: REs may co-accept only genuine trade bills, ensuring that goods covered are actually received in the borrower’s stock accounts. Proper records of co-accepted bills for each customer must be maintained for internal audit, so that the commitments for each customer and the total commitments at a branch can be readily ascertained. Co-acceptance of bills drawn by another RE, or where either party to the trade has received funding from any RE for the underlying transaction, is prohibited.

7. Other specific Guarantees: In respect of overseas transactions, REs permitted as Authorised Dealers may extend NFB facilities, including Guarantees, in line with the Foreign Exchange Management Act, 1999, for bona fide current or capital account transactions. AD banks may issue Guarantees to or on behalf of a foreign entity (or its step-down subsidiary controlled through an Indian entity), backed by counter-guarantee or collateral from the Indian entity or its group company, provided that the Guarantees are not used for raising loans or advances except in the ordinary course of business overseas. Effective monitoring of end-use is mandatory for such Guarantees.

8. Guarantees for stock and commodity market participants: Only Scheduled Commercial Banks (“SCBs”) may issue Guarantees on behalf of stock or commodity brokers to stock or commodity exchanges as a substitute for security deposits, but only to the extent that such Guarantees are permitted in the form of bank Guarantees under the rules of the respective exchanges. SCBs may also issue Guarantees in lieu of margin requirements, subject to applicable exchange regulations and RBI instructions as issued from time to time.

9. Disclosures: REs shall disclose the details of the NFB credit facilities that they provide, clearly specifying the Secured and unsecured portions of the NFB facility in the format provided in Chapter VI of the Directions.

Partial Credit Enhancement

1. Eligible providers and Beneficiaries: Under the Directions, the scope of providing PCE covers SCBs (excluding regional rural banks), All-India Financial Institutions, and NBFCs including HFCs in the Middle Layer and above (“PCE Permitted REs”), whereas under the earlier framework, only banks were permitted to provide PCE. The PCE Permitted REs can provide PCE to bonds issued by corporates, special purpose vehicles, and large non-deposit-taking NBFCs registered with the RBI with an asset size Rs. 1,000,00,00,000 (Rupees one thousand crore) and above. PCE may also be given to bonds issued by municipal corporations, subject to compliance with, inter alia, paragraph 2.3.7.3 (iii) of RBI’s Master Circular- Loans and Advances- Statutory and Other Restrictions, dated July 1, 2015 as amended from time to time.

2. Nature and structure of PCE: PCE is a subordinated, irrevocable contingent line of credit, drawn only when there is a cash flow shortfall in servicing the bonds. It may be structured as a revolving facility at the discretion of the provider. PCE Permitted REs must incorporate PCE-related provisions in their credit policy, covering limits, underwriting standards, risk assessment, and pricing. A clear agreement must be executed between the bond issuer, the PCE Permitted RE providing the enhancement, bondholders (through the trustee), and other project lenders.

3. Exposure limits and investment restrictions: Under the earlier framework, the aggregate exposure limit from the bank was capped at 50% (fifty percent) of the bond issue size, with an individual bank’s exposure limited to 20% (twenty percent). Under the revised framework, individual exposure limit for PCE Permitted REs has been increased to 50% (fifty percent) of the bond issue size, while the aggregate exposure limit remains unchanged at 50% (fifty percent). PCE must be irrevocable, provided at the time of bond issuance, and cannot take the form of a Guarantee. Under the earlier framework, banks providing PCE were restricted from investing in the bonds to which they had extended such credit enhancement; under the revised framework, this restriction applies to all REs, which are now barred from investing in any corporate bonds that are credit-enhanced by other REs.

4. Eligibility and capital requirements: Only bonds with a pre-enhanced rating of at least “BBB–” from an accredited rating External Credit Assessment Institution are eligible. Capital requirements are based on the amount of PCE and must be adjusted if the bond’s pre-enhanced rating changes, with stricter capital provisioning if the rating falls below investment grade. When a drawn tranche of a contingent PCE facility is outstanding for 90 (ninety) days or more, it is classified as a non-performing asset (“NPA”), the borrower’s other exposures with the PCE Permitted RE will also be classified as NPA. PCE exposure to a single counterparty or group must be within overall regulatory exposure norms, and a PCE Permitted RE’s aggregate PCE exposure must not exceed 20% (twenty percent) of its Tier 1 capital.

5. Additional conditions for NBFC/HFC bonds: For NBFC/HFC bonds, the tenor must be at least three years, proceeds can only refinance existing debt, and a PCE Permitted RE’s PCE exposure to each such issuer is capped at 1% (one percent) of its capital funds, within borrower exposure limits.

6. Disclosures and due diligence: Bond offer documents must disclose the rating with and without PCE. Project assets and cash flows linked to PCE-backed bonds must be ring-fenced through an escrow account under a bond trustee arrangement. Security interest and cash flow sharing arrangements between parties must be documented before issuance. Projects must have a sound financial structure even without PCE, and PCE Permitted REs must perform due diligence and credit appraisal before approval. The full PCE commitment must be honoured regardless of the borrower’s asset classification.

The Directions mark a welcome change as they broaden the scope of REs in the context of both Guarantee and PCE, and signal a positive move towards the consolidation of regulations applicable to NFB facilities.

Please find attached a copy of the Directions, here.

This update has been contributed by Utkarsh Bandhu (Partner) and Mrunalini Vengurlekar (Associate).

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