NBFCs – Vinod Kothari Consultants

Avoid Turning Your Referral Partner into a DSA/LSP

June 26, 2026/0 Comments/in Financial Services, NBFCs /by Staff

RBI regulatory framework for banks and NBFCs recognise entities such as LSPs and DSAs, but do not define the term “referral partner”. Consequently, several lenders engage referral partners under agreements that merely replicate the DSA arrangement with a change in the nomenclature but without altering its substance. This is a risky approach. Courts have held that the existence of an agency relationship depends on the rights created between the parties, not on the title of the agreement. Therefore, if a referral partner agreement authorises the intermediary to represent the lender or perform functions ordinarily discharged by a DSA or outsourced agent, the intermediary may be regarded as a DSA irrespective of its contractual designation. Accordingly, while drafting a referral partner agreement, equal attention must be paid not just to the scope of what can be done but also what the agreement does not permit. To understand the difference between a LSP, Referral partner and DSA, may refer to our resource Referral or Representation? The Fine Line Between LSP, DSA and Referral Partner.

Set out below are contractual provisions that should be avoided in an agreement with a referral partner.

Do not confer authority to make commitments: Such authority is inconsistent with a mere referral arrangement and indicates an agency relationship. The agreement should not permit the referral partner to:
1. assure loan sanction;
2. quote specific interest rates since that is a function of borrower risk and lender’s credit evaluation and interest rate model;
3. commit timelines for approval or disbursement; or
4. make any representation which is binding on the lender
Do not permit the referral partner to hold itself out as representing the lender: A referral partner should not portray itself as the lender’s representative or create the impression that it is authorised to act on the lender’s behalf. Accordingly, the agreement should prohibit the intermediary from describing itself as the lender’s agent or representative, using the lender’s name or branding in a manner that suggests an affiliation beyond a referral arrangement, or making any statement or representation that could lead customers to believe that it has authority to act for or bind the lender.
Do not permit collection or processing of loan applications and loan repayments: These functions form part of customer acquisition, onboarding and servicing, which are characteristics of DSAs or LSPs. A referral partner should not collect or verify KYC documents and/or scrutinise applications and collect customer information/documents in any manner. Further, activities such as identity verification, obtaining customer consents, conducting due diligence or facilitating KYC should remain with the lender or its authorised service providers. A referral partner should not participate in the lending process beyond introducing the customer.
Keep performance obligations limited to referrals: The referral partner should not be evaluated based on portfolio quality; recovery performance; or loan servicing metrics. Performance obligations should relate only to successfully introducing prospective customers.
No compensation linked to lending functions or loan performance: A success-based referral fee, by itself, does not create an agency relationship. However, the consideration should not be linked to underwriting, servicing, collections, portfolio performance, recoveries or any other lending function. The agreement should make it clear that the referral fee is payable solely for successful referrals and not for performing any activity connected with the lending process.
Do not authorise communication of lending decisions/negotiation: All customer communications should originate directly from the lender. The referral partner should not communicate sanction or rejection of applications; loan terms; deficiencies in documentation; repayment schedules; or disbursement confirmation. Further, negotiation on behalf of the lender is a strong indicator of representation/agency. The agreement should not authorise the intermediary to negotiate pricing; tenure; collateral requirements; repayment schedules; or restructuring terms.
Do not assign post-disbursement responsibilities: Its role should ordinarily cease once the customer has been introduced. The referral partner should not undertake collections; recovery; repayment follow-ups; customer grievance handling; restructuring assistance; or foreclosure processing.
Avoid clauses indicating exclusive representation: Clauses requiring the intermediary to exclusively promote the lender’s products or act as its sales representative reinforce the impression that the intermediary is representing the lender rather than merely referring customers.
Avoid excessive operational control: Compliance obligations may be imposed, but they should not amount to day-to-day supervision. Operational control is a recognised indicator of agency. Accordingly, the agreement should avoid prescribing detailed supervision clauses or detailed operational instructions unrelated to regulatory compliance.
Include non-agency provisions: The agreement should expressly provide that:
1. the referral partner is an independent contractor;
2. the relationship between the parties is on a principal-to-principal basis;
3. it has no authority to represent or bind the lender;
4. the referral partner shall not collect, process, or handle customer documents, KYC records, or sensitive customer information;
5. all lending decisions are taken exclusively by the lender;
Avoid agency terminology: Last but not the least, expressions such as authorised representative; sales representative; marketing representative; branch; agent; or authorised person should be avoided throughout the agreement because the language used often reflects the intended legal relationship.

The Sale That Was Never About the Product

June 23, 2026/0 Comments/in Financial Services, NBFCs, RBI, Uncategorized /by Staff

Why RBI’s New Directions on Responsible Business Conduct Could Change Financial Services More Than Any New Technology

– Guest Contributor | Dr. Aneish Kumar (aneishk@yahoo.com)

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Other Resources on the topic:

FAQs on Advertising, Marketing and Sale of Financial Products and Services, and agency activities: NBFCs

June 22, 2026/0 Comments/in Consumer Protection, Financial Services, NBFCs, RBI /by Staff

– Team Finserv | finserv@vinodkothari.com

In order to regulate mis-selling concerns for both products/ services of regulated entities and third-parties by a regulated entity, amendments have been issued ‘Advertising, Marketing and Sale of Financial Products and Services by Regulated Entities’, via two sets of amendment directions for NBFCs:

Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Second Amendment Directions, 2026 (‘RBC Amendment Directions’/’Amendment Directions’)
Reserve Bank of India (Non-Banking Financial Companies – Undertaking of Financial Services) Second Amendment Directions, 2026 (‘UFS Amendment Directions’)

(Refer to our detailed write up on the Amendment Directions here, our youtube video here. Further we are also hosting a half day workshop on June 26, 2025 (Physical-Bengaluru) where we will be discussing the Amendment Directions in details. The Brochure for the workshop can be accessed through here)

Refer to our FAQs on the Amendment Directions and the UFS Amendment Directions below

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Securitisation, Transfer and Distribution of Credit Risk- for Banks and NBFCs.

May 19, 2026/0 Comments/in Banks, Financial Services, NBFCs, Securitisation /by Staff

We are pleased to announce the launch of our e-book — Securitisation, Transfer and Distribution of Credit Risk- for Banks and NBFCs.

This book, spanning over 900+ pages, provides a comprehensive analysis of the evolving regulatory and transactional landscape relating to credit risk transfer in India, with detailed commentary on:
• RBI regulations on securitisation
• Transfer of Loan Exposures or so-called direct assignments
• Co-lending arrangements
• Loan syndication arrangements
• SEBI regulations governing the issue and listing of securitised debt instruments

Designed specifically for banks, NBFCs, market participants, legal professionals and compliance teams, the publication offers practical insights into the regulatory framework governing structured finance and credit distribution transactions.

The Commentary is based on RBI’s November, 2025 version of consolidated Directions.

The book was launched during the 14th Securitisation Summit, and the e-book is available exclusively through the Premium Section of our website.

Kindly note that access to the book will be for a period of one year from the date of purchase of the book.

Read an excerpt from the book here.

Click here to purchase now directly, or

Register your interests here!

Table of Contents

About the book ……………………………………………………………………………………………………………………………. 1
Preface to Second Edition …………………………………………………………………………………………………………… 22
Chapter 1: Understanding the Basics of Securitisation & Structured Finance ……………………………………. 24
Chapter 2: Securitisation in India: Tracing the developments in the market ………………………………………. 51
Chapter 3: Asset Classes and Structures in India ……………………………………………………………………………. 67
Chapter 4: Law of assignment and true sale of receivables ……………………………………………………………… 83
Chapter 5: Commentary on the Directions on Securitisation of Standard Assets ………………………………. 107
Chapter 6: Listing Regulations On Securitised Debt Instruments & Security Receipts ……………………… 458
Chapter 7: Commentary on the Directions on Transfer of Loan Exposures ……………………………………… 659
Chapter 8: Co-lending Arrangements …………………………………………………………………………………………. 844
Chapter 9: Loan syndication, Consortium Lending, Participation Certificates and Balance Transfers …. 917
Chapter 10: Taxation aspects of Securitisation, Transfer of Loan Exposures and Co-lending ……………. 939
ABOUT THE CONTRIBUTORS ……………………………………………………………………………………………… 960

FAQs on Type-I NBFC Registration Exemption

May 7, 2026/0 Comments/in Financial Services, NBFCs, RBI /by Staff

– Anita Baid, Dayita Kanodia & Chirag Agarwal | finserv@vinodkothari.com

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Option to exit: Type 1 NBFCs get continuing deregistration option

April 29, 2026/1 Comment/in Financial Services, NBFCs /by Staff

– Team Finserv | finserv@vinodkothari.com

Existing companies may apply within 6 months of 1st July; new companies may avoid registration on satisfying Type 1 and asset size conditions

The RBI’s relief to exempt pure investment companies from exemption from regulation, is now in final shape. We have earlier commented on the draft Amendment Directions. The final amendments in Directions, notified on 29th April, 2026, accept some of the public feedback. However, the condition that the NBFC seeking exemption should not have any debt on the liability, nor any debt on the asset side, even if from/to group entities, remains.

The exemption window opens on 1st July, based on asset size, no customer interface, no public funds and some other conditions (discussed below). The window remains till 31st Dec., 2026; however, even in future, it will be open for NBFCs to opt to exit from registration.

Indian Securitisation in FY26: Securitised Paper Volumes grow, with originator and asset diversity

April 14, 2026/0 Comments/in Banks, Financial Services, NBFCs, Securitisation /by Staff

– Vinod Kothari & Chirag Agarwal | finserv@vinodkothari.com

Volumes of securitisation (which, of course, have always included bilateral assignments or so-called DA transactions) fell by 6% in FY 26, if the origination volume by Reliance group entities in the first half were to be excluded. However, the market has shown more originator diversity, with an increasing share of smaller issuers, including those tasting the market for the first time.

The dip in volumes is because of the larger issuers who were prominently absent or subdued – Shriram Finance as the largest issuer having raised on-balance sheet liquidity, and banking companies. However, the share of gold loans went up sharply, largely due to the sharp increase in gold prices and gold lending, Microfinance companies went more for securitisation, rather than direct assignment transactions.

For anyone studying the Indian securitisation market, it is important to note the following:

Reported volumes in India include direct assignments, which, in international parlance, are not “securitisation” (pure bilateral loan sales). However, in India, traditionally, DA has been a close and quick proxy for securitisation, and hence, mostly included. In FY 26, the split of DA/PTC volumes shows PTC transactions having gained in proportion. One rating agency¹ reports an increase of PTC volume percentage from 54% to 60%; another one² shows the increase from 48% to 52%.
Indian transactions mostly show LAP transactions as a part of MBS, whereas what the world reports as RMBS is quite small in India. Last year, there was a prominent transaction by LIC Housing Finance, through the NHB-promoted RDCL. There was no RDCL issuance this year. It seems that RMBS volume was either too small to be reportable, or was completely absent.
Microfinance sector has been under some stress in the recent past; however, MFIs have increasingly resorted to PTC issuances, with small deal sizes. Some deal sizes are even below 100 crores. This is indicating greater diversity of issuers, and of course, yields and ratings.
The market also seems to be showing larger acceptance for lower rated securities i.e., BBB+.

Overall, in a stressful global scenario, securitisation has stood firm. Non financial sector entities have shown increasing willingness to tap the market. Of course, SEBI regulations have to be more enabling.

Below, we give a detailed overview of the securitisation market, including a discussion on the asset classes.

NBFCs vs Banks

Securitisation volumes have been largely driven by NBFCs, which recorded a 30% year-on-year increase in value. In contrast, originations by banks have declined significantly.

Recent Securitisation Structures in India – A Mix of Tradition and Innovation

Among asset classes, vehicle loans (including commercial vehicles and two-wheelers) accounted for 50% of securitisation volumes (vs 47% in the corresponding period last fiscal). Mortgage-backed loans accounted for about 28% of securitisation volume (vs 37% in the last FY).

Vehicle loan-backed securitisations dominated the market, both in terms of number of deals and total value, reaffirming the sector’s strong position. This is consistent with the growth trend in vehicle loan originations during FY 25.

In addition to vehicle loans, originators also securitised receivables from a diverse set of underlying asset classes during Q4, including:

Microfinance Loans
Secured Business Loans
Unsecured Business Loans
Home Loans
Unsecured Personal Loans
Gold Loans

The continued diversification in underlying asset classes highlights the evolving maturity of India’s securitisation market and growing investor appetite across segments. The break-up of securitisation volumes across various asset classes have been presented below:

Securitisation of Vehicle Loans

The issuance volume for vehicle loan securitisation during FY26 was approximately ₹1.26 lakh crores. Most of the transactions were structured as single-tranche issuances. However, a few exceptions featured more layered structures comprising senior and equity tranches, or senior, mezzanine, and equity tranches.

In terms of credit ratings, the tranches were rated between A- and AAA. Notably, the senior tranches in the majority of transactions received high investment-grade ratings, typically falling within the AA+ to AAA range. This indicates strong investor confidence and reflects the underlying credit quality of the asset pools, supported by adequate credit enhancement mechanisms.

Further, replenishing structures were also observed commonly during FY26. These variations indicate growing sophistication in transaction structuring within the vehicle loan securitisation space, aimed at catering to different investor preferences, improving credit protection, and aligning with originator risk appetite. As the market matures, further innovation in structuring and risk mitigation features can be expected.

In terms of credit enhancements, most vehicle loan securitisation transactions during the last quarter of FY26 featured: cash collateral (CC) and overcollateralisation (OC), with the Excess Interest Spread (EIS) serving as the first layer of loss absorption.

Securitisation of Microfinance Loans

During FY26, the MFI sector has seen a revival after a period of stress during FY 25 and FY 24. This has been due to better credit underwriting of lenders, improving performance trends and granular pool characteristics. Further, after a period of stress, the lenders relied on time-tested borrowers rather than exploring new markets leading to higher average ticket size of loans. This has led to a growth in the volumes of securitisation of microfinance loans during FY26. The PTC issuance volume of microfinance institutions increased to 14% of total PTC issuance in FY26 from 6% of total PTC issuances in FY25. Most of the transactions were structured as a single tranche securitisation.

Further, most microfinance loan securitisation transactions during the quarter featured credit enhancement through two primary mechanisms: CC and overcollateralisation OC, with the EIS serving as the first layer of loss absorption.

Securitisation of pool of loans backed by Home Loans & LAP

The volume of mortgage backed securitisation has been low both in terms of number as well as in terms of amount of issuance. As compared to FY25, the total MBS issuances dropped to 28% of total issuance from 37%. The transactions featured a common waterfall matrix and had received an overall rating of AAA.

In terms of credit enhancement, CC and OC has been provided as a credit enhancement with the EIS serving as the first layer of loss absorption.

Securitisation of Gold Loans

Gold loan securitisation volumes in H2FY26 stood at approximately ₹18,500 crore, significantly higher than the ₹5,000 crore recorded for the whole of FY25.

The jump in gold lending securitisation may be due to increase in gold prices and resultant increase in the value of the collateral. As a result of this valuation spike, average ticket sizes have increased, indicating that as gold valuations rise, consumers are leveraging higher-value loans to meet their financing needs. Another reason for the increased origination may be removal of LTV restriction in case of income generating gold loans.

Securitisation of Unsecured Loans

As per rating rationales published by Care the securitisation volumes of unsecured loans (both personal and business) increased during FY26. Investors in unsecured loan transactions, are preferring the PTC route, due to the support provided by external enhancement. CC and OC have also been provided as a credit enhancement with the EIS serving as the first layer of loss absorption.

Related articles:

Crisil report on securitisation volumes: https://www.crisilratings.com/en/home/newsroom/press-releases/2026/04/securitisation-deal-value-peaks-to-rs-2-55-lakh-crore-in-fiscal-2026.html ↩︎
Care report on securitisation volumes
https://www.careratings.com/uploads/newsfiles/1775801608_FY26%20Retail%20Securitisation%20at%20Rs%202.53%20Trillion%20First%20Dip%20PostPandemic.pdf ↩︎

RBI proposes changes to NBFC-UL identification

April 11, 2026/0 Comments/in Financial Services, NBFCs, RBI /by Staff

Anita Baid, finserv@vinodktohari.com

Revised Criteria for Classification

RBI has vide its Press Releases – Reserve Bank of India proposed to review methodology for identification of NBFCs in Upper Layer. The key changes are as follows:

Annual Classification: RBI shall conduct an annual identification process for classification of NBFCs in the Upper Layer.

It may be noted that NBFCs belonging to the banking group are also required to comply with the compliance requirements applicable to Upper Layer NBFCs (except the listing requirement). Our article on compliances to be followed by such NBFCs in the banking group can be seen here.

Criteria for classification: The current two-step approach (top ten by asset size and parametric scoring) will be replaced by a simple, absolute asset size criterion. The proposed asset size threshold for an NBFC to be classified as UL is ₹1,00,000 crore and above, as per the latest audited balance sheet (this limit is subject to review every 5 years).

A crucial question that arises here is whether the consolidation criteria (multiple NBFCs in the group) be applicable in this case as well to determine the asset size? Though as per prudence, it should apply, to avoid surpassing the regulatory intent, however, the same is specifically not applicable as per the SBR Directions (refer para 21) .

Inclusion of Government-owned NBFCs: Eligible Government-owned NBFCs will now also be considered for inclusion in Upper Layer, based on the revised asset size criteria. Previously, these were placed only in the Base or Middle Layer.

It may be noted that the category of NBFC is not a pre-condition, hence, the list of UL NBFCs would include not just NBFC-ICCs but also HFCs, CICs, deposit taking NBFCs, and not even Govt. NBFCs

Provision for Credit Risk Transfer: All NBFC-UL will be allowed to use State Government guarantees as a credit risk transfer instrument without any specific limit, provided they meet the prescribed conditions.

Implications of NBFC-UL Classification

Once the proposed criteria are implemented and the new list of Upper Layer NBFCs is notified by the RBI, entities classified as NBFC-UL will face certain immediate implications, in addition to specific corporate governance norms. The central point of discussion is how these requirements might impact the growth plans of large NBFCs.

CET 1 requirement: NBFC-UL are required to maintain Common Equity Tier 1 capital of at least 9% of Risk Weighted Assets.

While CET 1 is currently manageable for most existing UL entities, aggressive growth plans could potentially make this a constraining factor for larger NBFCs newly classified as UL.

Leverage Restriction: In addition to CRAR, NBFC-UL shall also be subject to leverage requirements to ensure that their growth is supported by adequate capital, among other factors. Also, NBFC-UL shall be required to hold differential provisioning towards different classes of standard assets.

Leverage ratio would have been an issue if the entity was engaged in derivatives transactions. However, most of the NBFCs in India are not very active in this space.

Exposure Framework: NBFC-ULs are required to adhere to the Large Exposures Framework. Furthermore, their Board must determine internal exposure limits for important sectors, including exposure to the NBFC sector, in addition to limits on internal exposures to Sensitive Sector Entities (SSEs).

The applicability of the large exposure framework may be a real concern. Large exposure framework looks at economic interdependence as the basis of classification into group risk. There is an absolute limit that the single party exposure cannot be more than 20% of Tier 1 capital (including quarterly audited profits) and 25% in case of a group of counterparties.

Listing Requirement: NBFC-ULs must be mandatorily listed within three years of being identified and notified as such. Unlisted NBFC-ULs shall be required to make the necessary arrangements for listing within this three-year period.

CICs not accessing public funds: Under the CIC Directions, those CICs that don’t have access to public funds, irrespective of the asset size, are eligible to be classified as an unregistered CIC. Accordingly, such CICs should not be classified in the upper layer even if they breach the asset size criteria.