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Informist, Wednesday, Apr. 9, 2025

--RBI releases draft norms on non-fund based credit facilities 

MUMBAI – The Reserve Bank of India on Wednesday issued draft guidelines to "harmonise and consolidate" non-fund based credit facilities across all entities. The central bank announced the draft norms in the Monetary Policy Statement earlier in the day. Non-fund based facilities are services extended by banks in terms of guarantees instead of loans, giving an assurance to the third party or seller. The facility includes guarantees, letters of credit, and co-acceptances. 

The credit policy should entail suitable provisions for issue of non-fund based credit facilities such as type, limits granted, credit appraisal, controls, fraud prevention, overall monitoring mechanism, delegation matrix and other safeguards, the regulator said. 

Regarding issuance of guarantee, the revised norms only allow authorised dealer Category-I banks to take part in a guarantee, for guaranteeing a debt, the draft said. Likewise, only scheduled commercial banks are authorised to issue guarantees on behalf of share and stock-brokers.

According to the draft, the guarantee exposure will be capped at 5% of the total assets as per the previous financial year's balance sheet. Of which, the unsecured guarantees will be restricted to a maximum of 25% of the overall limit. The maximum tenor of the guarantees extended should not be more than 10 years.

The revised guidelines also include a review of instructions on issuance of partial credit enhancement by regulated entities to broaden funding sources for infrastructure financing. The RBI allows regulated entities to extend partial credit enhancement to bonds issued by corporates, special purpose vehicles, and non-deposit taking non-bank lenders with minimum asset size of INR 10 billion and whose pre-enhanced rating is 'BBB-' or above. The facility aims to enhance the credit rating of the bonds issued so as to enable corporates to access the funds from the bond market on better terms, the regulator said.

When issuing partial credit enhancement facility, the credit policy of entities should consider issue, quantum, underwriting standards, assessment of risk, pricing, and setting limits, among others. The facility will be issued in the form of line of credit, which will be drawn if there is a shortfall in cash flows for servicing the bonds and thereby may improve the credit rating.

The partial credit enhancement exposure of an individual entity is capped at 50% of the bond issue size and aggregate exposure of all entities has also been capped at the same threshold. The proposed norms bars regulated entities to participate in corporate bond issuances which are credit enhanced by other entities.

All the related entities and stakeholders can submit their feedback on the proposed guidelines by May 12, the RBI said.  End

Reported by Christina Titus 

Edited by Ashish Shirke

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