Reserve Bank of India (RBI) has come up with Non-Fund Based Credit Facilities Directions, 2025 yesterday. These guidelines permit regulated entities (RE) such as banks, All India Financial Institutions (AIFIs), alternative investment funds, Non-Banking Financial Companies (NBFCs) and development finance institutions to provide credit enhancement, helping infrastructure companies to improve their ratings while freeing up bank limits for these companies.

Non-fund based (NFB) facilities like guarantees, letters of credit, co-acceptances etc. facilitate effective credit intermediation and smooth business transactions. In order to harmonize and consolidate guidelines covering these facilities across the entities regulated by the Reserve Bank and to broaden the funding sources for infrastructure financing, the Reserve Bank had issued draft guidelines on NFB facilities for public comments on April 9, 2025. The comments received thereon have been analysed and suitably incorporated in these Directions.

RBI noted that all regulated entities have been allowed to provide partial credit enhancement (PCE) to bonds issued by corporates/ special purpose vehicles (SPVs) for funding all types of projects and to also bonds issued by non-deposit taking NBFCs with asset size of Rs 1,000 crore. The RBI has also permitted regulated entities to also provide credit enhancement support to municipal bonds in the final guidelines, marking a change from the draft guidelines issued in April.

Capital requirements for regulated entities (REs) have also not been changed from the April draft norms. Similarly, REs can provide a credit enhancement limit of 50% of the bond issue from 20% earlier. The proceeds of money raised from the credit enhanced bonds to pay off bank loans.

The new norms are expected to free up limits for infrastructure financing and bring more companies into the bond market.

The manner in which the project cash flows would be shared for servicing loans, if any, and the bonds and PCE, shall be decided and agreed upon before the issue of bonds and shall be properly documented. To be eligible for PCE, corporate bonds shall be rated by a minimum of two credit rating agencies.
RBI noted that the credit policy of a RE shall incorporate suitable provisions for issue of NFB facilities, inter alia, covering aspects relating to type of NFB facilities, limits granted, credit appraisal, security requirement, fraud prevention, overall monitoring mechanism including post-sanction monitoring, delegation matrix, audit and internal controls, compliance to uniform standards issued by standard setting bodies and other safeguards. A RE shall issue a NFB facility only on behalf of a customer having funded credit facility from the RE.

A RE shall put in place suitable internal aggregate/ individual ceilings for issuance of guarantees in general and unsecured guarantees in particular.
REs permitted as Authorized Dealer (AD) may extend NFB facilities as permitted under the extant regulations/ Directions issued under Foreign Exchange Management Act, 1999, for bonafide current or capital account transaction, including guarantees in respect of debt or other liability incurred by an exporter on account of exports from India. AD banks are also permitted to issue guarantee to or on behalf of a foreign entity, or any of its step-down subsidiary in which an Indian entity has acquired control through the foreign entity, which is backed by a counter-guarantee or collateral by the Indian entity or its group company.