All in the Group and still a Customer! 

Whether lending to a group entity should be considered as customer-interface?

-Archisman Bhattacharjee | finserv@vinodkothari.com

Introduction

A significant  part of the RBI’s regulatory framework for Non-Banking Financial Companies (NBFCs) hinges on a fundamental distinction: whether or not an NBFC maintains a customer interface. This is not a mere definitional distinction; it is a classification that dictates the scale of regulatory oversight, the applicability of consumer protection norms, and the intensity of several conduct-of-business compliance obligations. NBFCs that directly engage with customers are naturally placed under a stricter regime, while those that operate without such interaction enjoy lighter requirements. These NBFCs which do not have a customer interface and do not also access public funds are called NBFC-Type I.

Over the years, the question of what constitutes a customer interface has become particularly relevant in the context of intra-group lending or investments, particularly due to various RBI inspections taking the view that lending to group companies would constitute a customer interface. 

Several NBFCs exist within large corporate structures primarily to channel resources, support affiliates, or manage liquidity. These entities may satisfy the Principal Business Criteria (PBC) due to their financial exposures, but their activities are inward-looking, directed towards group entities rather than external borrowers. The critical question, therefore, is whether such intra-group arrangements amount to customer interface and, by extension, should trigger the full force of customer-facing regulatory obligations.

What is Customer Interface?

Under paragraph 5.1.7 of the SBR Master Directions, customer interface is defined as “the interaction between the NBFC and its customers while carrying on its business.” This definition is deliberately functional rather than exhaustive: it focuses on the activity (interaction) and its context (carrying on business), rather than prescribing a closed set of situations.

The emphasis on the phrase “carrying on its business” is particularly significant. It indicates that a customer must be a counterparty in the ordinary course of the NBFC’s commercial operations and not merely any entity that happens to receive funds. In other words, the concept of customer interface is tied intrinsically to the NBFC’s core business activity of lending to the public.

Why Intra-Group Exposure Does Not Constitute Customer Interface? 

In common law and statutory usage, the term “customer” has consistently been interpreted as a person who “customarily” engages in transactions with a business in the ordinary course of that business. For instance, in banking law, a customer is understood to be someone who avails services as part of the bank’s normal commercial activity. Further in the case of Central Bank of India Ltd, Bombay v Gopinath Nair, the Kerala High Court held that “Broadly speaking a customer is a person who has the habit of resorting to the same place or person to do business. So far as banking transactions are concerned he is a person whose money has been accepted on the footing that the banker will honour up to the amount standing to his credit, irrespective of this connection being of short or long standing”. Hence, by analogy, the customers of an NBFC must be external parties who approach the NBFC to avail credit facilities or financial services on a customary or habitual basis. Group entities where shareholding, management, and control substantially overlap cannot be equated to customers because they are not recipients of services in a public-facing manner. 

The term interface denotes an interaction or point of engagement. In a regulatory context, it implies a structured touchpoint between the regulated entity and the public. The RBI itself, in various guidelines [e.g.,Reserve Bank of India (Digital Lending) Directions, 2025], uses customer interface in the sense of touchpoints where information asymmetry, mis-selling, or customer protection concerns arise.

Therefore, “interface” is not a mere exchange of funds or internal arrangement, but a public-facing interaction where there exists a possibility of unequal bargaining power or lack of transparency.

Thus, two essential features of customer interface can be distilled:

1. Continuity – the interaction must be continuous and recurring, not occasional or incidental.
   
2. Public-facing intent – the engagement must involve outsiders who depend on the NBFC for financial services, thereby creating a relationship of trust and reliance.

Both of these features are absent in the case of intra-group lending. Such arrangements are internal in nature, do not involve outreach to the public, and are rarely profit-oriented in the sense of a lending business. Instead, they serve strategic or treasury functions within the corporate group, such as capital support, liquidity management, or restructuring.

Recognising these boundaries is critical because the existence of a customer interface is the very trigger for applying customer-protection frameworks such as the Fair Practice Code (FPC). The FPC is designed to safeguard the interests of external borrowers  ensuring transparency of terms, access to grievance redressal, and protection against coercive recovery practices. Applying the same requirements to intra-group transactions, where information symmetry, common control, and strategic alignment already exist, would serve no regulatory purpose. On the contrary, it would amount to over-regulation by imposing obligations on entities that are essentially performing internal treasury functions rather than carrying on a customer-facing business.

In this sense, drawing a clear distinction between intra-group exposures and genuine customer-facing activities ensures that regulatory focus remains proportionate, protecting external customers where risks truly arise, while sparing internal arrangements that fall outside the spirit of the definition of customer interface.

We elaborate below as to why intra group lending should not be considered as customer interface:

1.  Lack of Public-Facing Element

The very essence of a customer interface lies in an NBFC’s interaction with external borrowers. Intra-group exposures, however, are confined to entities that share common promoters, directors, or shareholders. These are closed-loop transactions, where the lender and borrower operate under a shared governance and strategic framework.

Unlike external customers, group entities are neither exposed to the risk of unfair treatment nor reliant on contractual disclosures for access to information. In fact, since such exposures qualify as related party transactions, they are subject to scrutiny by the Company’s Audit Committee before any loan is sanctioned. This governance layer ensures that the terms of intra-group lending are transparent and balanced, leaving little scope for unfairness. Moreover, decision-making in such cases takes place openly at the board level, where all stakeholders are aligned, thereby eliminating any imbalance of power that would warrant regulatory protection.

Accordingly, extending the definition of customer interface to cover intra-group lending would dilute the concept and inappropriately capture transactions that present no risk to public interest.

Furthermore, it may be noted that in the case of traditional lending carried out by NBFCs, the pricing, interest rates, nature of products, gradation of risk, and other key terms are typically standardised and publicly displayed on the company’s website. This transparency serves a dual purpose: first, to advertise the lending products and make them accessible to the public at large; and second, to invite applications from potential borrowers who may be interested in availing such loans.

In contrast, the mechanics of group-based lending are fundamentally different. Within a corporate group, there may be entities of varying asset sizes, engaged in different businesses, operating in diverse markets, and facing distinct funding requirements. Owing to this diversity, the lending framework in a group context is neither uniform nor product driven. There are typically no “products” to be advertised, no fixed interest rates or standardised terms of loans to be disclosed, and no public invitation to borrow.

Instead, intra-group lending is inherently bespoke and situational. The credit terms, underwriting approach, risk assessment, and pricing are determined on a case by case basis depending on the specific needs and circumstances of the borrowing entity. Such terms are often deliberated and approved at the Audit Committee level to ensure compliance with arm’s-length principles and corporate governance standards, rather than to create a retail offering capable of being replicated across multiple borrowers.

This absence of a standardised product architecture is deliberate, as intra-group lending is designed to address funding requirements of group companies rather than to cater to a general pool of customers. Accordingly, no fixed menu of products, pricing slabs or credit gradation mechanisms are put in the public domain, because such entities have no interest in engaging with or attracting third-party customers.

From a regulatory perspective, this also underscores why intra-group lending cannot be equated with “customer interface.” A customer interface presupposes the existence of an offering made available to the public, where external customers engage with the lender to access financial products or services. In the case of intra-group lending, however, the transactions are internal and driven by efficiency and liquidity management considerations at the group level. As there is no solicitation of, or engagement with, the public at large, intra-group lending in our view does not give rise to a customer interface in the regulatory sense.

2. Redundancy of Fair Practice Code (FPC) in Intra-Group Context

The FPC is designed as a safeguard for external customers, those who may lack visibility into the governance of the lender and who need assurances of fairness, transparency, and accountability. It among other requirements requires NBFCs to:

• Maintain a grievance redressal mechanism;
• Avoid coercive or aggressive recovery practices; and
• Ensure equitable treatment across borrowers.

Within a group structure, however, these safeguards are unnecessary. Group companies share common ownership and control, and decisions are taken with full knowledge at the board or promoter level. The asymmetry of information that the FPC seeks to address is simply not present. Imposing FPC requirements in such a context would add regulatory burden without advancing its core purpose of protecting outsiders.

3. Strategic Nature of Group Lending

Intra-group exposures are not aimed at generating profits through lending operations. Instead, they are typically undertaken for strategic objectives such as corporate restructuring, maintaining liquidity buffers or supporting capital adequacy within the group. These activities resemble financial housekeeping rather than commercial lending (particularly in case of Core Investment Companies).

For instance, a parent company may extend funds to a subsidiary facing temporary liquidity stress or an investment arm may deploy surplus capital in the group to optimize group-wide resource utilisation. These transactions are motivated by stability and efficiency rather than by an intent to earn interest income from the market. Such strategic objectives make intra-group exposures qualitatively different from customer-facing lending, which is inherently profit-driven and involves third-party risks.

Further it may be noted that providing funds within a group, other than by acquiring ownership, can broadly take two forms either by extending loans or by investing in debt instruments. The choice between the two structures generally depends on commercial, taxation, regulatory, as well as accounting considerations. However, a common underlying aspect remains that such exposures are typically strategic in nature, rather than being aimed at servicing an external client base. In practice, there are also instances where debt instruments may subsequently be converted into loans or vice versa, depending on liquidity constraints.

It may be noted that in the case of unquoted debentures, the investing entity is required to maintain asset classification and provisioning in line with those applicable to loans. This demonstrates that, from a prudential regulatory perspective, the treatment of loans and debt instruments is aligned. Both forms of funding are essentially intra-group exposures and do not involve dealing with external customers, and hence, from a regulatory standpoint, should be viewed consistently as not amounting to a customer interface.

4. Treasury Function Analogy

When exposures are confined within the group, the NBFC essentially assumes the role of a treasury function,centralising capital allocation, liquidity management, and financial risk balancing across the group entities. This is similar to the internal finance department of a conglomerate, which manages funds for the collective benefit of the enterprise.

This existence of a group level treasury function has also been recognized by the IFSCA vide notification dated April 04, 2025 which permits a finance company/finance unit set up at IFSCA to act as global/regional corporate treasury functions. Among the permissible activities that can be carried out by these finance companies/finance units among others include:

• Credit arrangements;
• Liquidity management;
• Acting as a holding company

[Refer para 13 of the above mentioned notification]

Further reference may also be drawn to the Consultation Paper dated September 12, 2024 issued by the IFSC, wherein para 2 states:

“A Treasury Centre functions as an in-house bank for multinational corporations. Its main objectives are to manage funds centrally and optimize the use of funds within the various entities of the multinational corporation (the “Group”). Key responsibilities include intra-group financing, managing cash and liquidity, and providing financial advisory services to group entities.”

While we acknowledge that the IFSCA is a distinct regulatory authority, the definition and stated objectives of a Treasury Centre as outlined in the consultation paper are instructive and cannot be disregarded. They demonstrate the clear policy rationale behind permitting such entities to provide funding to group companies, namely, to enable centralised fund management and efficient allocation of resources across the Group.

This construct is materially different from lending undertaken by NBFCs in the ordinary course of business, where the primary activity is extending credit to third parties on a commercial basis. In contrast, a Treasury Centre is not designed to operate as a lender to the public but rather as an internal funding and liquidity management mechanism within a corporate group. Its activities are aimed at enhancing group-level efficiency, minimising funding costs, and ensuring optimal deployment of surplus liquidity objectives that go beyond the traditional credit intermediation role of NBFCs. To treat such treasury-like operations as customer interface would conflate two distinct roles: internal capital management and external lending business. Preserving this distinction is vital to avoid overregulation and misapplication of customer-protection frameworks.  

Conclusion

The RBI’s framework draws a deliberate line between NBFCs that maintain a customer interface and those that do not, precisely to calibrate regulation in proportion to risk. Intra-group lending, when carefully examined, does not cross that line. Such exposures lack the defining elements of customer interface, continuity of public-facing interactions and a relationship of reliance with external borrowers. They are strategic, inward-looking, and governed through common ownership and transparent board-level processes, with little scope for the kind of vulnerabilities that the Fair Practice Code and other consumer-protection frameworks are designed to address.

Extending the concept of customer interface to intra-group transactions would blur the distinction between internal treasury management and genuine lending business, imposing disproportionate compliance on entities that pose no risk to public interest. A purposive interpretation of the term aligned with common law, statutory analogies and the RBI’s own regulatory intent supports the view that intra-group lending should remain outside its scope. Doing so preserves regulatory clarity, prevents overreach, and ensures that supervisory attention remains focused where it matters most: on protecting external customers who depend on NBFCs in the ordinary course of their business.

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