Master Direction on ETPs: Key Changes & Compliance Guide

Harshita Malik, Executive | finserv@vinodkothari.com

Background and Overview:

The evolution of Electronic Trading Platform (‘ETPs’) is rooted in the market’s need for speed, efficiency, and enhanced transparency in dissemination of  trade information. Traditional floor based trading methods struggled with sluggish processes, limited data dissemination, and inefficiencies that couldn’t pace with a global financial landscape. In response, industry players and regulators recognised the need for a digital overhaul, a system that could streamline trade execution, provide real-time market data, and foster a more accurate price discovery mechanism. This led to the emergence of specialised platforms, such as those designed for government securities trading, where primary dealers are entrusted with membership and operations. One such platform is ETP. 

An ETP is a computarised system that facilitates the buying, selling and management of a wide range of financial instruments (listed down below). These platforms enable real-time market data dissemination, order execution, and efficient trade processing. For instance, in India, platforms such as the NDS-OM (Negotiated Dealing System – Order Matching) are well-known examples that specialize in government securities (g-sec) trading. Other entities include various bank-operated ETPs such as BARX operated by Barclays Investment Bank (international) and proprietary systems developed by financial institutions such as 360TGTX operated by Three Sixty Trading Networks (India) Pvt. Ltd. 

On June 16, 2025, the RBI issued Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2025 (‘New ETP Directions’) in supersession of the Electronic Trading Platforms (Reserve Bank) Directions, 2018 dated October 05, 2018 (‘Erstwhile ETP Directions’). This was based on the feedback received on the Draft Directions issued  on April 29, 2024. 

Applivability:

  • Entities operating ETPs facilitating transactions in eligible instruments,under the New ETP Directions,
  • Grandfathering clause:
    • Any entity already authorised under the Erstwhile ETP Directions shall deemed to have been authorised under the New ETP Directions, or
    • any action already taken under the Erstwhile ETP Directions “shall be deemed to have been taken” under the New ETP Directions. 

In practical terms, operators need not re-submit applications, seek fresh authorisations or revisit past actions as long as compliant under the Erstwhile ETP Directions.

Effective Date:

Effective immediately i.e. from June 16, 2025.

All about Electronic Trading Platforms (‘ETPs’)

Before going ahead to analyse the changes let us understand what ETPs are. ETPs are electronic systems, other than recognised stock exchanges, on which transactions in eligible instruments are contracted. But why would someone prefer trading on ETP rather than other exchanges/ platforms such as stock exchanges? ETPs offer eligible entities multi-instrument trading platforms (dealing with money-market, G-Secs, FX, swaps etc.) with tailored tenures and faster settlement process while stock exchanges cater to listed equities and futures with standardised contracts, retail participation and fixed trading hours.

Who operates these electronic systems?

Any entity as defined in the New ETP Directions incorporated in the form of a company and authorised by the RBI in this regard can operate an ETP. Currently, there are 12 authorised ETP operators under the Erstwhile ETP Directions who shall continue to operate under the New ETP Directions.

Types of ETP: Single Dealer Platform v. Multi-Dealer Platform

BasisSingle Dealer PlatformMulti-Dealer Platform
SellerA single bank or financial institutionSeveral banks and financial institutions
PricingTailored pricing from one provider.Competitive pricing with options from several liquidity providers.
LiquidityLowHigh
Liquidity sourceProvided by a single bank or institution.Aggregated liquidity from multiple banks/institutions.
CustomisationTailored interfaces and services designed for specific clients.More standardized interfaces across multiple dealers; less tailored.
Execution qualityStable and consistent execution within one controlled environmentBest execution can be sought across multiple quotes and providers
SuitabilityClients who value a close banking relationship and prefer a dedicated, controlled trading environment Clients who want to compare and execute trades across a range of prices and liquidity providers
ExampleNDS-OM, operated by Clearcorp Dealing Systems (India) Ltd., provides a secondary market platform for government securities owned by RBI360TGTX, operated by Three Sixty Trading Networks (India) Pvt. Ltd., provides a platform for trading in FX Spot, Forwards, Swaps and Options

Players on ETP

  1. Primary Dealers- In 1995, the RBI introduced the system of PDs in the Government Securities (G-Sec) Market. The objectives of the PD system are to strengthen the infrastructure in G-Sec market, development of underwriting and market making capabilities for G-Sec, improve secondary market trading system and to make PDs an effective conduit for open market operations (OMO).

The RBI currently extends various facilities to the PDs to enable them to fulfill their obligations, including memberships of electronic dealing, trading and settlement systems (NDS platforms/INFINET/RTGS/CCIL).

PDs are classified as below:

  1. Standalone Primary Dealers- NBFC-ML
  2. Bank Primary Dealers- Scheduled Commercial Banks and Central Banks- National and International
BasisStandalone Primary DealerBank Primary Dealers
Entity StructureOperate as independent legal entities, often registered as NBFCs or as dedicated subsidiaries/joint ventures.Operate as a departmental function within a scheduled commercial bank (or its branch, including foreign banks).
Regulatory FrameworkRBI guidelinesRBI Guidelines and bank specific norms
Business focusPrimarily focused on government securities trading and related activities, often with more flexibility to diversify (e.g., underwriting, trading derivatives).The primary dealer function is one element of a larger suite of banking services and is more integrated with the bank’s overall operations.
Operational IndependenceGreater operational autonomy, being solely focused on the government securities marketFunctions as an integral part of the bank’s operations, with decisions influenced by the broader business strategy of the bank
PDs registered with RBISBI DFHI LimitedBank of Baroda, Bank of America
  1. Traders

Analysis of Change

Having understood the nomenclature, we may proceed to analyse the changes and what they mean for Regulated Entities. The primary change and intent of the Draft Directions was to curb unregulated entities and platforms, specifically offshore platforms dealing with foreign exchange trading involving inshore/ domestic investors. Please note that foreign exchange instruments have been a part of eligible instruments, however, due to not being defined, the question whether such offshore ETPs would be covered, was always a question. The Draft Directions recommended certain changes, however, the major change was bringing offshore ETPs under the domain of RBI. However, the finalised New ETP Directions do not deal with this aspect.  

While the RBI largely accepted the foundational architecture proposed in the draft, it has revised certain provisions to provide clarity in many areas, especially around risk and operational aspects which are now expressed in more precise terms along with addition of new provisions around enforcement and transitional mechanisms.

Highlights of Major Changes: 

  • Expanded applicability to include outsourcing entities under the purview of the New ETP Directions in essence
  • Carve out to single dealer banks and Standalone Primary Dealer (‘SPD’)
  • Transition to an electronic application process: Moving away from physical submission, the application process is now streamlined through the PRAVAAH portal
  • Quarterly and annual reporting requirements for the operators introduced mandating regular updates thereby tightening regulatory oversight
  •  Framework for data preservation and sharing post-authorisation 

Comparison at a Glance:

AreaErstwhile ETP DirectionsNew ETP DirectionsImplications
Application process for authorisationPhysical submissionThrough PRAVAAH Portal of RBIStreamlining the process, enhancing accessibility, efficiency, and real-time tracking for applicants as well as regulators 
Quarterly reportingNo such requirementQuarterly reporting on functioning of ETPs by Operators (details covered below)Operators to provide periodic updates on operational performance, ensuring regulatory oversight
Annual ReportingNo such requirementAnnual reporting on compliance of the New ETP Directions and terms and conditions prescribed (details covered below)Operators to yearly confirm their adherence to updated regulatory guidelines and contractual conditions
Eligibility CriteriaDid not apply to ETPs operated by SCBs Apply to all the entities including SCBs operated ETPs (except exemption covered below)Banks must now play by the same rulebook as other operators, additionally Public Sector Banks shall have to  incorporate (or spin off) a Companies Act vehicle, infuse requisite capital and adhere to technological standards.
Until now, Public Sector Banks that operate an ETP slipped neatly around the RBI’s “company‐only” eligibility gate. The New ETP Direction takes away that privilege. From the day the change takes effect, every ETP, bank-owned or not must meet the same bar
Preservation, access and use of dataDid not have a provision for treatment of data in the event of cancellation of authorisationSpecifies the requirement to share data, along with form and manner, with the RBI or any agency in the event of cancellation of authorisation as may be called upon by the RBI or any other agency.Enhanced regulatory oversight and post-termination accountability on operators
Definition of ‘Entity’….an agency formed as a ‘company’ and incorporated under the Companies Act, 2013 (or earlier acts)”….any person, natural or legal.Language of the New ETP Directions seems to widen the scope of entity, however reading the impact along with para 6(f)(iii), it only brings the outsourcing entities under the widened scope
Grandfathering RuleNot needed (first issue)All licenses/actions under Erstwhile ETP Directions shall be treated as validNo fresh registration required
ExemptionETPs operated by banks for their customer on a bilateral basis as long as no market is being created for the securitiesCarve out to SCBs (including branches of Foreign Banks operating in India) and SPDs wherein the bank or the SPD operating the electronic system is the sole quote/price provider and a party to all transactions contracted on the system.Banks and SPDs can operate proprietary trading platforms without the full weight of the standard compliance requirements set for multi-dealer platforms. This can streamline their internal processes and reduce regulatory and technological burdens.Acting as the sole quote provider makes these institutions both the operator and counterparty. This can improve execution speed and reduce inter-dealer friction.A single market maker model may lead to faster execution but can constrain competitive pricing, potentially resulting in wider spreads if the operator does not face rival pricing pressures from other dealers.While banks and SPDs gain efficiency due to lesser compliances, they must remain vigilant about disclosure and transparency requirements to avoid any adverse effects on market integrity.Banks and SPDs may develop more tailored platforms, exclusive systems to capture niche market segments.Synchronization with global norms that treat single-dealer platforms as an extension of the dealer’s book and not that of an exchange.

Reporting Requirements:

These new requirements shall have to be complied with along with the existing reporting requirements under the Erswhile ETP Directions from the effective date of the New ETP Directions. Accordingly, the first quarterly report shall be required to be submitted on or before 15th July, 2025 and the annual report shall be submitted on or before 30th April, 2026. The manner of reporting by ETP operators as per the New ETP Directions has been listed below:

Reporting RequirementReporting AuthorityFrequencyFormatTimeline
NewFunctioning of the platform, including but not limited to the following points:Events resulting in disruption of activities, during the quarter, if anyInstances of market abuse, during the quarter, if anyDetails about any material change in trading procedure or technology carried out during the quarterRBIQuarterlyAnnex-2 of the New ETP DirectionsOn or before 15th day of the month following the quarter
Compliance with the New ETP Directions and terms and conditions prescribed at the time of authorisationRBIAnnuallyNot specifiedon or before the 30th of April of the succeeding financial year
Data relating to activities on the ETPRBIPost cancellation of authorisationAs may be prescribedAs may be prescribed
ExistingTransaction informationTrade repository or trading platformAs may be prescribedAs may be prescribedAs may be prescribed
Other report, data and/or information as required by RBIRBIAs may be prescribedAs may be prescribedAs may be prescribed
Data/informationAny agency as required by Indian LawsNot specifiedNot specifiedNot specified
Event resulting in disruption of activities or market abuseRBIEvent-basedNot specifiedNot specified

Conclusion:

By introducing defined protocols for risk management, data governance and reporting, the updated framework seeks to close existing regulatory gaps. Key provisions of the New ETP Directions include, amongst others, a clear exemption for single–dealer platforms and a streamlined application process via the PRAVAAH portal. These measures ensure legal continuity. Ultimately, this transformative framework not only reinforces the integrity of the trading ecosystem but also cultivates an environment conducive to innovation.

Balancing flexibility and discipline: Analysis of RBI’s Project Finance Directions, 2025

Aanchal Kaur Nagpal, Senior Manager and Simrat Singh, Senior Executive | finserv@vinodkothari.con 

Project loans, used to finance large infrastructure and industrial ventures like highways, power plants and railways etc., are fundamentally different from regular business or personal loans. Unlike typical loans that are repaid from either the borrower’s existing operations and  balance sheet (in case of the former) or the borrower’s own credit worthiness (in case of the latter), project loans are forward-looking: they primarily rely on cash flows of the project, generated only after the project becomes operational. Because of this, delays in project completion due to various factors such as land acquisition issues and regulatory delays which may be beyond the control of the developer  are common. These may arise from. Such delays, though being routine and not necessarily indicating borrower’s stress, triggered adverse asset classifications under the existing rules. 

When the RBI introduced its 2019 prudential framework to enable early recognition and time bound resolution of stressed assets, it excluded such project loans from its scope (see para 25). As a result, these continued to be governed by old norms, specifically para 4.2.5 of the 2015 IRCAP and later, para 3 of Annex III under the RBI SBR Directions. However, these norms  did not reflect the unique risks faced by project finance especially during the construction phase.

To address these issues, the RBI released the Draft Project Finance Directions in May 2024, proposing a dedicated regulatory framework tailored to project loans. The Project Finance Directions (‘Directions’) have been issued on 19 June, 2025. This article explores the need for such a framework, the changes brought in the regulatory regime, and their impact on borrowers and lenders.

Project finance vs other kinds of finance

In corporate lending, credit decisions are primarily based on the borrower’s balance sheet strength, existing cash flows and overall financial health. where the lender primarily  assumes credit risk

In contrast, in project finance, repayments as well as the primary security depend primarily on the successful implementation and projected cash flows of a specific project, rather than the borrower’s overall financial position. Accordingly, the lender takes two different risks: 

  1. Project risk i.e. the risk that the  project may face commencement delays due to factors like regulatory bottlenecks, land acquisition issues or construction delays and;
  2. Credit risk i.e. the risk of inadequacy of cashflows to make the scheduled contractual payouts. 

Importantly, in project finance, delays in cashflows often happen due to non-credit factors linked to project execution, mainly project delays. As a result, automatic downgrading of classification due to any project delay may not only fail to provide a true risk profile of the loan but also cause increased provisioning burden on the lender. 

Overview of the Directions

The Directions deal with the following broad aspects: 

  1. Classification of projects and project finance;
  2. Prudential requirements for extending project loans including:
    1. Provisioning requirements;
    2. Conditions for sanction, disbursement and monitoring.
  3. Resolution and restructuring of project loans
    1. Either due to stress;
    2. Extension/ delays in DCCO.

Applicability

Classification of ‘project’ and ‘project finance’

Under the Directions, a project is defined as to involve capital expenditure for the creation, expansion or upgradation of tangible assets or facilities, with the expectation of long-term cash flow benefits [see para 9(l)], with the following features: 

Project finance is a method of funding where the project’s cash flows/ revenue own revenues are the primary source of repayment as well as the and security for the loan [see para 9(m)].

  • It can be:
    • Greenfield (new project);
    • Brownfield (existing project enhancement).

To qualify as project finance under the Directions:

Note: Loan terms can differ across lenders if agreed by all parties

The earlier definition of project finance under the SBR Directions was generic and vague, referring merely to a “project loan” as any term loan extended for setting up an economic venture. The Directions have provided more clarity on what would be considered as project finance and have linked it to the definition of project finance under the Basel Framework, while also providing a quantitative threshold of 51%. 

Project finance envisages the lender’s exposure in a project, which is typically in the process of being set up. The repayment will be from the project cashflow i.e. the payout structure is connected with the commencement of commercial operations of the project. The lending is based on the projected cash flows of the project rather than the balance sheet of the developer. It is distinct from asset finance, where loans are backed by existing assets generating income. Further, project finance differs from a working capital loan/general corporate purpose loan where the latter is towards financing the working capital needs of the developer entity based on the overall health of the entity.

Would it mean that project loans cannot have any other collateral and must solely rely on the project as the security? The answer is negative since the threshold specified allows to have other/ additional collateral, say, personal guarantee of the developer etc., however, the primary security shall be the project cashflows.

Other important terminology

DCCO 

The Date of Commencement of Commercial Operations (DCCO) is a key milestone in project finance, marking the transition from construction to operational phase when a project begins to generate revenue.The Directions recognises three forms of DCCO. [see Para 9(e) to (m)]

CRE and its sub-category CRE-RH

Defined in Directions on Classification of Exposures as Commercial Real Estate Exposures, CRE refers to loans or exposures where repayment primarily depends on income generated by the real estate asset itself. This typically includes office spaces, malls, warehouses, hotels and multi-family housing complexes that are leased or sold in the open market. Since CRE is a sub-head of project finance, it also follows similar characteritics of project finance i.e.both repayment of the loan and recovery in case of default are closely tied to the cash flows from the real estate asset  such as rental income or sale proceeds. [see para 9(b)]. The definition is aligned with the definiton of income-producing real estate (IPRE) under Basel norms. Our article discussing CRE can be assessed here. https://vinodkothari.com/2023/04/commercial-real-estate-lending-risks-and-regulatory-focus/

Commercial Real Estate – Residential Housing (CRE-RH) [see para 9(c)]

Since residential housing projects generally pose lesser risk and volatility compared to commercial properties, the RBI created a distinct sub-category within CRE called CRE-RH vide notification dated June 21, 2013. CRE-RH includes loans given to builders or developers for residential housing projects meant for sale.To classify as CRE-RH, the project must be predominantly residential and commercial components like shops or schools should not exceed 10% of the total built-up area (FSI). If the commercial area crosses this 10% threshold, the entire project will be CRE. This distinction isn’t just semantic, it has regulatory benefits. Since CRE-RH are subject to lower risk due to various reasons such as diversified cash flows and lower dependency on a single occpnt, RBI has assigned lower capital risk weights i.e. 75% to CRE-RH compared to standard CRE 100% and lower provisioning provisioning requirements (0.75% vs. 1%).

Prudential requirements 

Provisioning requirements

In the context of project finance, where risks vary across different phases of a project’s lifecycle, a one-size-fits-all provisioning approach throughout the project life may not be relevant. . 

Under the SBR, provisioning norms made no distinction between the construction and operational phases of a project. A uniform provisioning rate was applied i.e. 0.75% for CRE-RH and 1% for CRE while other loans were provisioned at 0.4% irrespective of whether the project was just starting construction or had already begun generating revenue. This approach, while simple, failed to reflect the heightened risks associated during the construction phase , such as delays, cost overruns, or regulatory hurdles.

To address this gap, the Draft Directions, proposed a conservative approach calling for a 5% provision during the construction phase and 2.5% during the operational phase, with the operational rate reducible to 1% if following conditions were met:

  1. the project demonstrated positive net operating cash flows sufficient to service all current repayment obligations, and
  2. there was a minimum 20% reduction in long-term debt from the level outstanding at the time of achieving DCCO.

These draft norms were considered overly harsh, particularly for long-gestation infrastructure projects where cash flows stabilise gradually.

Taking stakeholder feedback into account, the Directions adopted a more balanced g structure as follows: 

Project typeConstruction PhaseOperational phase – after commencement of repayment interest and principle
Commercial real estate (CRE)1.25%1%
CRE – Residential Housing1%0.75%
Other projects1%0.40%
DCCO deferred projects:Additional provisioning to be maintained depending on the type of project:0.375% per quarter for infra projects0.5625% per quarter for non-infra projects
NPA project finance accountsAs per extant instructions 
Provisionig for existing projectsContinued to be governed by extant norms;If resolution is done for any fresh credit event or change in terms occur after the effective date of these directions, then provisioning as per these Directions

Conditions of project finance

The onus is on the lender to ensure that the following conditions are met before extending any project finance. These conditions will ensure that the facility is structured prudently and is aligned with the implementation as well as cash flows of the project, thereby mitigating both credit as well as project risk. The requirements are more or less similar to the earlier Directions. 

Repayment schedule during operational phase is designed to factor initial cash flows

  • Repayment tenor, including the moratorium period, if any, shall not exceed 85% of the economic life of a project.
  • This means there is a mandatory 15% tail period i.e. if the project has an economic life of 20 years and the loans are to be repaid in 17 years, the last 3 years are the tail period.Tail period gives comfort to the lender that in case of any default or delay in repayment by the time of maturity, there is still some period left to recover dues from the project cash flows after the scheduled loan maturity.
  • Would this mean that a borrower cannot obtain a  top-up loan after the expiry of 85% of the loan tenure? 
  • The requirement applies to loans with all kinds of tenures, either short or long. 

One borrower, multiple lenders

  1. If a project is financed by more than one lender, RBI mandates that the DCCO, whether original, extended or actual, shall be the same across all lenders. This will ensure that:
  1. DCCO is uniform across all lenders 
  2. Project progress as well as any delays are uniform across all lenders
  3. Uniform asset classification, preventing any lender from having a different provisioning status. 
  1. To ensure balanced risk sharing, the Directions have put consortium lending limits (Para 15): Where projects are under-construction: 
  1. Aggregate exposure of all lenders is ≤ ₹1,500 crore: each lender shall hold at least 10% of total exposure;
  2. For projects with exposure > ₹1,500 crore: each lender must hold at least 5% or ₹150 crore, whichever is higher.

These caps essentially require participating lenders to hold sufficient skin in the game and thereby promote responsible credit appraisal as well as avoid risk from being concentrated in a few lenders, especially where other lenders have negligible exposure and hence, less incentive to ensure monitoring. 

  1. Inter-lender transfer 
  2. These minimum exposure norms will not apply to operational phase projects;
  1. In design or construction phase, lenders are permitted buy/sell exposure only under syndication arrangements as per TLE, and within the exposure limits
  2. In operational phase, exposures can be freely transferred as per TLE norms.

This may be because construction and pre-operational stages are inherently more uncertain and riskier, and therefore, the regulator requires lenders who are willing to remain committed and not exit easily to avoid creating instability.

Project lifecycle – 3 different phases

A project has been divided into 3 phased viz Design, Construction and Operational.

Why does this classification matter?

The regulatory framework treats each phase differently for various risk, compliance and prudential reasons. 

  1. Disbursement discipline (Para 21)
    1. Disbursal of funds must be linked to project completion milestones i.e. completion of phases.
    2. Lenders must also track progress in equity infusion and other financing sources as agreed at financial closure
  2. Asset classification (Para 22 & 29)
    1. In design and construction phases, loans can be classified as NPA based on recovery performance, as per IRACP norms. 
    2. Once an account is classified as NPA, it can only be upgraded after demonstrating satisfactory performance during the operational phase
  3. Resolution trigger (Para 23)
    1. If any credit event (e.g., default) occurs with any lender during the construction phase, a collective resolution process is triggered
  4. Provisioning norms (Para 32)
    1. Provisioning rates are higher for projects under construction
    2. Once the project enters the operational phase, provisioning reduces, reflecting lower credit risk.

Mandatory requirements before sanctioning a project finance loan: (13)

  1. Achievement of financial closure and documentation of original DCCO;
  2. Project specific disbursement schedule vis a vis stage of completion is included in loan agreement
  3. Post DCCO repayment schedule designed to factor initial cash flows

Prudential conditions related to disbursement and monitoring:

Lender to ensure the following:

  1. Clearances are obtained by the lender:
    1. All requisite approvals/clearances for implementing/constructing the project are obtained before financial closure.(examples: environmental clearance, legal clearance, regulatory clearances, etc.)
    2. Approvals/clearances contingent upon achievement of certain milestones would be deemed to be applicable when such milestones are achieved. 
  2. Availability of sufficient (prescribed) minimum land/right of way with the lender before disbursal of funds
    1. This would mean that lender must ensure that the builder executing the project has either:
      1. Ownership of the land (through purchase, lease etc.) or
  3. Legal rights to use/access the land i.e. Right of Way.
  4. For PPP projects, disbursal of funds to occur only after declaration of the appointed date. 
    1. Except where non-fund based facilities are mandated by the concessioning authority as a pre-requisite for declaration of the appointed date itself;
  5. Disbursal to be proportionate 
    1. To stages of completion of project, infusion of equity or other sources of finance and receipt of clearances
    2. Lender’s Independent Engineer/Architect to certify the stages
  6. Creation and maintenance of a project finance database (see para 37):
    1. Every lender to capture and maintain, on an ongoing basis, project specific information relating to:
      1. Debtor and project profile;
      2. Change in DCCO;
      3. Credit events other than deferment of DCCO;
      4. Specifications of project
    2. Any updation shall be made within 15 days from any change in information;
    3. Necessary systems to be placed within 3 months from the effective date ie by 1st January, 2026

Resolution of Project Loans

Prudential norms for resolution

  • Lender to monitor performance of project on on-going basis;
    • Expected to initiate a resolution plan well in advance.
  • Collective resolution to be initiated by the lenders in case credit event happens with any one lender
  • In case of any credit event;
    • Lender to report the same:
      • to the Central Repository of Information on Large Credit and;
      • to all other lenders, in case of consortium lending.
    • Lender to take a review of debtor account within 30 days.
      • Inter creditor agreement and decision to implement a resolution plan may be done during this period.
      • Implement the resolution plan within 180 days from the end of the review period.

Resolution plans involving extension of DCCO

Paragraphs 26 to 28 provide a structured framework under which project loans may continue to be classified as ‘standard’ despite delays in project completion, provided specific conditions are met. The objective is to offer flexibility to lenders and borrowers in addressing genuine project delays or cost escalations, without triggering an immediate downgrade to NPA so long as the resolution is timely and prudently implemented.

  • Permitted DCCO deferment
    • The DCCO may be deferred, with a corresponding adjustment in the repayment schedule. However, such deferment is subject to the following maximum limits:
      • Up to 3 years for infrastructure projects
      • Up to 2 years for non-infrastructure projects (including commercial real estate)
  • Cost overrun associated with the DCCO deferment:
    • A cap of 10% of the original project cost, over and above Interest During Construction (IDC)
    • The overrun must be financed through a Standby Credit Facility sanctioned at the time of financial closure
    • Post-funding, key financial metrics such as the Debt-Equity ratio and credit rating must remain unchanged or show improvement in favour of the lender
  • Deferment in DCCO associated with change in scope and size
    • Rise in project cost (excluding cost overrun) is at least 25% or more of the original project outlay
    • Reassessment of project viability by the lender before approving the revised scope and DCCO
    • If the project has an existing credit rating, the new rating must not deteriorate by more than one notch; if unrated and aggregate lender exposure is ₹100 crore or more, the revised project must obtain an investment-grade rating
    • This benefit of maintaining ‘Standard’ classification due to a change in scope can be availed only once during the project’s life
  • Resolution plan (‘RP’) deemed successfully implemented only if:
    • Necessary documentation completed within 180 days from the end of the Review Period and;
    • Revised capital structure and financing terms are duly reflected in the books of both the lender and the borrower. 
  • Immediate downgrading to NPA if the resolution plan is not implemented within the timeline and conditions above
    • Once NPA, account can be upgraded only after:
      • Satisfactory performance post actual DCCO, in case of non-compliance with conditions of resolution plan;
      • Successful implementation of resolution plan, in case of non-implementation of RP within the specified time.

NBFC Regulatory Refresher

RBI Updates for NBFCs- A rerun of the regulatory changes introduced during FY 24-25

– Team Finserv (finserv@vinodkothari.com)

Watch our youtube video: https://youtu.be/Vg4vFrWfzsw

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“There is no such thing as government money – only taxpayer money.”

— Margaret Thatcher

RBI has introduced a significant amendment to the prudential treatment of Security Receipts (SRs) guaranteed by the Government of India through its latest circular dated March 29, 2025. What this amendment briefly means is, that for sale of bad loans to NARCL, funded by issue of sovereign-backed SRs, the banks may book a gain equal to the sale consideration minus the provisioned value of the bad loans. Interestingly, this treatment will be applied not only to transactions done after the amendment, but to existing SRs held by banks too. 

By way of a background, National Asset Reconstruction Company Limited (NARCL), along with its sister body India Debt Resolution Company Ltd. (IDRCL), was created to clean up the legacy stressed assets with an exposure of Rs 500 crore and above in the Indian Banking system. A 2021 cabinet note approved the grant of GOI guarantee for the SRs issued by NARCL for the bad loans it will buy from banks. When banks sell bad loans to NARCL (or, for that matter, to any other ARCs), they put in 15% of their own funds, and for the balance, they issue a paper called SRs. While presumably the bad loans are to be bought at their fair value, given that the chunk of the value is funded by the issue of this paper, one may understand that the fair valuation is quite often an abstraction.

As per para 77 of the TLE Directions, in respect of the stressed loans transferred to the ARC, the transferors are required to carry the investment in their books on an ongoing basis, until its transfer or realization, at lower of the redemption value of SRs arrived based on the NAV as above, and the NBV of the transferred stressed loan at the time of transfer. Hence, there is no gain on sale booked at the time of the sale, even if the sale is at higher than the net book value.

However, the RBI made a specific amendment, targeted at NARCL SRs (as those are the only ones guaranteed by GOI), having the effect of saying that, in view of the GOI guarantee, banks holding the SRs may value them at their face value. As a result, banks may book the entire difference between the sale consideration of the bad loans, and the net-of-provisions value of the loans, as a gain on sale or reversal of the provision. Either way, the credit goes to P&L account.

Key Highlights of the Circular

There are, of course, several caveats to booking this gain on sale. First of all, let everyone understand that the loans have been languising in the books of the banks for several years, and therefore, they would have mostly slipped in the category of “doubtful assets”, requiring steep and progressively scaling-up provisions.  Therefore, it is quite likely that the fair value, which may, in turn, be influenced by the likely value in case of a resolution plan or liquidation, or the value of the underlying secured assets, may be substantially higher than the provisioned value.

The circular makes the following crucial changes to the treatment of SRs guaranteed by the sovereign:

  1. Reversal of Excess Provision: When a loan is transferred to an ARC for a value higher than its Net Book Value (NBV), the excess provision can be reversed to the P&L account. However, this is permitted only if the sale consideration consists solely of (i) cash and (ii) SRs guaranteed by the Government of India. 
  2. Deduction from regulatory capital: Despite allowing provision reversals or gain on sale, the RBI mandates that the non-cash component (SRs) must be deducted from Common Equity Tier 1 (CET 1) capital/Tier 1 Capital. Additionally, no dividends can be paid out of the SRs component, ensuring that banks do not distribute unrealized profits to shareholders. This means that the provision reversal or gain on sale will stay in the bank’s balance sheet as a non-distributable surplus. How long will this credit remain non-distributable? Since the government guarantee is valid only for 5 years, it is incumbent that NARCL will do either a resolution or liquidation of the borrower sooner than this period. Eventually, the SRs may receive cash distribution, either by way of realisation from the bad loans, or by way of the devolvement of the GOI guarantee, or both. Will the non-distributable credit become part of usual distributable profits when the value of the SRs is realised? While the circular does not give clarity on the subsequent treatment of the credit, our understanding says, yes.
  3. Periodic Valuation Based on NAV: The SRs will be periodically valued based on the Net Asset Value (NAV) declared by the ARC, derived from the recovery ratings of such instruments. Here once again, it is not clear whether the recovery ratings will be disregarding the underlying GOI guarantee. Logically, since the SRs are fully guaranteed, there is no reason for the rating to drop. But if the recovery ratings are done disregarding the guarantee, then the valuation of the SRs is bound to drop in the near future, making the FY 24-25 profit short-lived. 
  4. Final Valuation of SRs: If SRs remain outstanding after the final settlement of the government guarantee or upon the expiry of the guarantee period, they will be valued at a nominal price of ₹1. 
  5. Conversion of SRs: If the SRs are converted into another form of instrument as part of the resolution process, their valuation and provisioning will follow the provisions outlined under the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019.

The Implications of RBI’s Move

The amendment, issued just 2 days to the end of the fiscal year, means a lot to the profit and loss accounts of the banks holding the SRs. 

However, on a policy front, it leaves several questions to be answered. The loans were evidently bad to their core. If the loans had any value in the hands of the banks, the banks would have used the several tools in their arsenal to recover them. Not that ARCs were unknown to the banks, or that IBC was far away from them. Therefore, if the banks were tempted to sell them to NARCL, the only reason would have been that the sale consideration, to the extent of 85% in form of paper-against-paper, was attractive. This paper, in the form of the SRs, suddenly means a lot of value in what was all this while not turning into value at all.

Central Government guarantee of Rs.30,600 crore to back Security Receipts issued by NARCL for acquiring stressed loan assets has been approved by the Union Cabinet. NARCL proposes to acquire stressed assets of about Rs. 2 Lakh crore in phases through 15% Cash and 85% in SRs. IDRCL will be engaged for management and value addition once NARCL acquires the assets. 

It may be noted that according to the FAQs released by the Ministry of Finance on the subject, such sovereign guarantee will incentivize quicker action on resolving stressed assets thereby helping in better value realization. The FAQs state that this approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. Further, it will bring about improvement in the bank’s valuation and enhance their ability to raise market capital.

GOI guarantee is essentially tax payer’s money, eventually to fill the gap left in recovering a bad loan. Of course the bad loan is money lent by a bank to a bad borrower. Therefore, indirectly, the cost of this bad lending is transferred to the taxpayers.

It is quite okay for the GOI to recapitalise banks, but is it okay for the RBI or  GOI to insert an item on the P/L accounts of banks by converting an imaginary profit into value?

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Our Resources on the topic:-

  1. RBI raises red flag on increasing personal loan
  2. FAQs on Regulatory measures towards consumer credit and bank credit to NBFCs
  3. Workshop on RBI Circular on Regulatory Measures in Consumer Credit by Banks & NBFCs (YouTube live)