Banking group NBFCs:  Need to map businesses to avoid overlaps with the parent banks

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– Vinod Kothari | finserv@vinodkothari.com

The new dispensation implemented from 5th December 2025 implies that lending business, obviously carried in the parent bank, needs to be allocated between the bank and the group entities so as to avoid overlaps. The bank will have to take its business allocation plan, at a group level, to its board, by 31st March 2026.

The RBI’s present move has certain global precedents. Singapore passed an anti-commingling rule applicable to banking groups way back in 2004, but has subsequently relaxed the rule by a provision referred to as section 23G of the Banking Regulations. However, the approach is not uniformly shared across jurisdictions.

We are of the view that as the decision works both at the bank as well as the NBFC/HFC level, the same has to be taken to the boards of the respective NBFCs/HFCs too.

Businesses which currently overlap include the following:

  1. Loans against properties
  2. Housing finance
  3. Loans against shares
  4. Trade finance
  5. Personal loans
  6. Digital lending
  7. Small business loans
  8. Gold loans
  9. Loans against vehicles  – passenger and commercial, or loans against construction equipment

In our view, banks will have serious concerns in meeting their priority sector lending targets, unless they decide to keep priority sector lending business in the bank’s books. Priority sector lending is quite often much less profitable, and the NBFCs in the group are able to create such loans at much higher rates of return due to their delivery strengths or customer franchise. As to how the banks will be able to originate such loans departmentally, will remain a big question.

There are other implications of the above restrictions too:

  1. If a bank is engaged, for example, in MSME lending, but auto loans are done at the group entity, the bank cannot be a co-lender with its group entity, nor can it acquire auto loans originated by its group entity.
  2. Extending the same argument, if the banking group is carrying auto loan activity in its group NBFC, it cannot buy auto loans either by way of a direct assignment or co-lending, originated by other banks or other independent NBFCs. The reason for this is obvious – if the bank has decided to carry auto lending activity in its group entity, it should stay away from that exposure, even if originated by other entities.
  3. The decision to keep particular loan products with group entities – can it be stretched to the extent that bank will not have indirect exposure in such products, for example, by way of giving a loan to its group entity for on-lending for a product which the bank does not undertake departmentally? One of the reasons that may have prompted the Mohanty Group report in 2020 to segregate products between the bank and its group entities was contagion risk. If contagion is at the core of the present restriction, then that risk is still there even if the bank lends to a group entity for on-lending for a product. However, in our view, the present restriction is primarily aimed at avoiding regulatory arbitrages, and cannot be expected to require a completely independent financing of the loan products that a subsidiary finances, and not the bank.
  4. Therefore, in our view, a bank may not only on-lend to its group entities (of course, on the basis of an arm’s length lending approach), but it may also buy the asset-backed securities arising from such loan portfolios as sit with its group entities.

Factors to decide loan product allocation

In case of several non-lending products such as securities trading, demat services, etc., the approach may be easier. However, lending services constitute the bulk of any bank’s financial business, and group NBFCs and HFCs are also evidently engaged in lending. Hence, there may be a delicate decisioning by each of the boards on who does what. Note that this choice is not spasmodic – it is a strategic decision that will bind the entities for several years.

The factors based on which banks will have to decide on their business allocation may include:

  1. Delivery mechanisms – Mostly, branch and team strengths are sitting in group entities. Therefore, the loan products that entail last mile customer outreach, geographical access, etc are naturally housed in entities which possess those abilities.
  2. Technology strength: Some of the products are based on fintech or similar technology strength, which may be sitting with respective entities.
  3. Recovery mechanisms – Group entities are typically more nimble than banks. Hence, while banks may keep loans on their books, but they may engage group entities for recovery purposes.
  4. Priority sector requirements-:  This will be a very important factor in deciding business allocation. Banks are mandated to invest 40% of their ANBC in qualifying priority sector loans – not NBFCs. Hence, for such loans as qualify as priority sector, the option may be to house the portfolios with the bank, or to invest in pass through certificates.

Securitised notes: whether investment in group entities?

Talking about pass through certificates, there is a complicated question as to whether the investment limits imposed by the 5th Dec. 2025 amendment on aggregate investments in group entities will include investment in pass through certificates arising out of pools originated by group entities. In our view, the answer is in the negative, as the investment is not originator, but in the asset pools. However, if the bank makes investment in the equity tranche or credit enhancing unrated tranches, the view may be different.

Conclusion

Banks are heading shortly in the last quarter of a year which is laden with strong headwinds. In this scenario, facing business allocation decisions, rather than business expansion or risk management, may be more challenging than it may seem to the regulators.

Other resources:

Bank group NBFCs fall in Upper Layer without RBI identification

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– Dayita Kanodia | finserv@vinodkothari.com

RBI on December 5, 2025 issued RBI (Commercial Banks – Undertaking of Financial Services) (Amendment) Directions, 2025 (‘UFS Directions’) in terms of which NBFCs and HFCs, which are group entities of Banks and are therefore undertaking lending activities, will be required to comply with the following additional conditions:

  1. Follow the regulations as applicable in case of NBFC-UL (except the listing requirement)
  2. Adhere to certain stipulations as provided under RBI (Commercial Banks – Credit Risk Management) Directions, 2025 and RBI (Commercial Banks – Credit Facilities) Directions, 2025

The requirements become applicable from the date of notification itself that is December 5, 2025. Further, it may be noted that the applicability would be on fresh loans as well as renewals and not on existing loans. The following table gives an overview of the compliances that NBFCs/HFCs, which are a part of the banking group will be required to adhere to:

Common Equity Tier 1RBI (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Directions, 2025Entities shall be required to maintain Common Equity Tier 1 capital of at least 9% of Risk Weighted Assets.
Differential standard asset provisioning RBI (Non-Banking Financial Companies – IncomeRecognition, Asset Classification and Provisioning) Directions, 2025Entities shall be required to hold differential provisioning towards different classes of standard assets.
Large Exposure FrameworkRBI (Non-Banking Financial Companies – Concentration Risk Management) Directions, 2025NBFCs/HFCs which are group entities of banks would have to adhere to the Large Exposures Framework issued by RBI.
Internal Exposure LimitsIn addition to the limits on internal SSE exposures, the Board of such bank-group NBFCs/HFCs shall determine internal exposure limits on other important sectors to which credit is extended. Further, an internal Board approved limit for exposure to the NBFC sector is also required to be put in place.
Qualification of Board MembersRBI (Non-Banking Financial Companies – Governance)Directions, 2025NBFC in the banking group shall be required to undertake a review of its Board composition to ensure the same is competent to manage the affairs of the entity. The composition of the Board should ensure a mix of educational qualification and experience within the Board. Specific expertise of Board members will be a prerequisite depending on the type of business pursued by the NBFC.
Removal of Independent DirectorThe NBFCs belonging to a banking group shall be required to report to the supervisors in case any Independent Director is removed/ resigns before completion of his normal tenure.
Restriction on granting a loan against the parent Bank’s sharesRBI (Commercial Banks – Credit Risk Management) Directions, 2025NBFCs/HFCs which are group entities of banks will not be able to grant a loan against the parent Bank’s shares. 
Prohibition to grant loans to the directors/relatives of directors of the parent BankNBFCs/HFCs will not be able to grant loans to the directors or relatives of such directors of the parent bank. 
Loans against promoters’ contributionRBI (Commercial Banks – Credit Facilities) Directions,2025Conditions w.r.t financing promoters’ contributions towards equity capital apply in terms of Para 166 of the Credit Facilities Directions. Such financing is permitted only to meet promoters’ contribution requirements in anticipation of raising resources, in accordance with the board-approved policy and treated as the bank’s investment in shares, thus, subject to the aggregate Capital Market Exposure (CME) of 40% of the bank’s net worth.  
Prohibition on Loans for financing land acquisitionGroup NBFCs shall not grant loans to private builders for acquisition and development of land. Further, in case of public agencies as borrowers, such loans can be sanctioned only by way of term loans, and the project shall be completed within a maximum of 3 years. Valuation of such land for collateral purpose shall be done at current market value only.
Loan against securities, IPO and ESOP financingChapter XIII of the Credit Facilities Directions prescribes limits on the loans against financial assets, including for IPO and ESOP financing. Such restrictions shall also apply to Group NBFCs. The limits are proposed to be amended vide the Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025. See our article on the same here. 
Undertaking Agency BusinessReserve Bank of India (Commercial Banks – Undertaking of Financial Services) Directions, 2025 NBFCs/HFCs, which are group entities of Banks can only undertake agency business for financial products which a bank is permitted to undertake in terms of the Banking Regulations Act, 1949. 
Undertaking of the same form of business by more than one entity in the bank groupUFS DirectionsThere should only be one entity in a bank group undertaking a certain form of business unless there is proper rationale and justification for undertaking of such business by more than one entities. 
Investment RestrictionsRestrictions on investments made by the banking group entities  (at a group level) must be adhered to. 

Read our write-up on other amendments introduced for banks and their group entities here.

Other resources:

  1. FAQs on Large Exposures Framework (‘LEF’) for NBFCs under Scale Based Regulatory Framework
  2. New NBFC Regulations: A ready reckoner guide
  3. New Commercial Bank Regulations: A ready reckoner guide

The will of the borrower: Do Balance Transfers Count as Loan Transfers?

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-Dayita Kanodia & Chirag Agarwal | finserv@vinodkothari.com

The RBI, as part of its recent consolidation exercise, has consolidated various instructions applicable to NBFCs and issued 34 Master Directions. Our analysis of these can be accessed here.

Loan transfers are now governed by the RBI (Non-Banking Financial Companies – Transfer and Distribution of Credit Risk) Directions, 2025 (‘Transfer Directions’), which assimilates the erstwhile TLE and Co-lending Directions. 

One notable change (which was not there in the Draft) appears in the provisions relating to transfer of loan exposures. Para 31 of the Directions provides a carveout for items which will be excluded from the purview of the Directions. One of the exclusions, which has existed since the 2012 Guidelines, is the exclusion for balance transfers. That exclusion has now been removed.

This change raises the question of whether NBFCs are now required to comply with the provisions of the Transfer Directions, even in cases where it is the borrower who requests the transfer of its loan account.

Case of Balance Transfer

Balance transfer is an arrangement where a borrower who has already availed credit from a particular RE identifies another lender willing to offer a loan at a lower interest rate. In such cases, the borrower requests the existing lender to pre-close the loan account using the funds provided by the new lender. The essence is that the transaction happens at the instance of the borrower.

While BTs can take place for a number of reasons, it generally happens when the borrower finds another lender offering loans at a lower interest rate. Other common BT causes include:

  1. Better Loan Terms: More flexible repayment schedules, lower processing fees, reduced foreclosure charges, or longer tenure options.
  2. Top-Up Loan Facility: The new lender may offer a top-up loan along with the transfer at attractive rates.
  3. Improved Customer Service: Borrowers often move due to dissatisfaction with the existing lender’s service quality, delays, or poor communication.
  4. Switching from Floating to Fixed (or vice versa): A borrower may want to change the interest type depending on market outlook or personal preference.
  5. Consolidation of Loans: Borrowers might transfer in order to consolidate multiple loans under one lender for easier management.

BTs typically take place in longer-term loans such as housing loans and LAP. 

Typically, the borrower is also charged a prepayment penalty when the existing lender pre-closes the loan account.

Is BT a case of Transfer?

As discussed above, balance transfer is not, per se, a transfer of the loan account between lenders; rather, it is a situation in which one lender effectively steps into the place of another at the request of the borrower.

It may also be noted that the Directions recognise only three modes of transfer of loan accounts:

  • Assignment 
  • Novation 
  • Loan participation

BT, however, does not fall under any of the above modes. 

Further, the introduction to the Transfer Directions states:

Loan transfers are essential to the development of a credit risk market, enabling diversification of credit risk originating in the financial sector and ensure the availability of market-based credit products for a diversified set of investors having commensurate capacity and risk appetite.

BT, on the other hand, does not achieve any credit-risk redistribution. The incoming lender is not purchasing risk, but issuing a fresh loan directly to the borrower. In essence, a balance transfer is not a credit risk transfer; rather a refinancing transaction driven by the borrower’s choice, without any movement of the underlying asset.

Situation for Banks

It may be noted that, in the case of banks, a specific exclusion has been provided for situations where the transfer of a loan account occurs at the instance of the borrower. In such cases, banks are required to comply with the provisions set out under Chapter III of Part C of the Reserve Bank of India (Commercial Banks- Transfer and Distribution of Credit Risk) Directions, 2025.

However, for banks, the concept of inter-bank transfer of loan accounts exists, whereas for NBFCs, there is only a pre-closure of the loan account by one lender using funds obtained from another lender.

Conclusion

Accordingly, in our view, the position for NBFCs in respect of balance transfers remains unchanged, and there is no requirement to comply with the provisions of the Transfer Directions. It must, however, be ensured that such borrower-initiated transfer requests are responded to by the concerned NBFC within 21 days, as required under Para 19 of Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Directions, 2025.

Our Other Resources

2025 RBI (Commercial Banks – Governance) Directions – Guide to Understanding and Implementation

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RBI Guidelines on Governance in Banks_2025Download

Private Credit AIFs: Lenders of Last Resort?

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Simrat Singh | Finserv@vinodkothari.com

Private credit is becoming a new force in India’s lending ecosystem. As traditional banks and NBFCs operate under the strict regulations on capital, exposure and asset quality norms, they are often unable, or unwilling to cater to certain borrowers. In addition, for banks in particular, what kind of lending opportunities can be tapped is often a matter of having typecast lending products, policies and procedures. This leaves occasional, however, lucrative gaps in funding needs which are not serviced by regulated lenders. Into these gaps step in Private Credit AIFs (in India), Business Development Companies (BDCs) and Private Collateralized Loan Obligations (CLOs) (in the USA and Australia), these funds can structure deals creatively, customise financing to borrower needs and capture higher-yield opportunities that conventional lenders must pass over. What is emerging is a parallel channel of credit, one that is nimble, agile and focused.

Globally, this shift hasn’t gone unnoticed. Policymakers and institutions like the IMF have flagged the risks tied to private credit markets, especially around opacity, leverage and borrower quality (see below). Yet in India, the momentum continues to build. Tight constraints on banks, the rise of alternative asset managers and the unmet capital needs of businesses beyond the traditional credit universe are all fuelling rapid expansion.

This article examines what private credit is, why it is growing in India, the risks associated with this market and whether their growth creates regulatory arbitrage relative to banks and NBFCs.

What is Private Credit?

As per an IMF paper1, private credit is defined as “non-bank corporate credit provided through bilateral agreements or small “club deals” outside the realm of public securities or commercial banks. This definition excludes bank loans, broadly syndicated loans, and funding provided through publicly traded assets such as corporate bonds.

Simply, private credit is the lending by non-bank and non-NBFCs. The sector predominantly involves alternative asset managers2 who raise capital from institutional investors using closed-end funds and lend directly to predominantly middle-market firms3.

How is it Different From Normal Credit?

Unlike traditional credit, private credit is typically tailored to the specific needs of each borrower. Repayment terms can, for instance, be aligned with the timing of a funding round or disbursements can be structured to match capital expenditure plans. Interest rates may also be designed on a step-up basis, linked to the borrower’s turnover. Many elements that are otherwise rigid under RBI-regulated lending can be flexibly structured in private credit (see table 2 below). This flexibility is especially valuable for start-ups and small businesses, which often require customised financing solutions that traditional lenders may be unable to provide. 

ParameterPrivate CreditTraditional Credit
Source of CapitaPrivate debt funds (Category II AIFs), investors like HNIs, family offices, institutional investorsBanks, NBFCs and mutual funds
Target BorrowersCompanies lacking access to banks; SMEs, mid-market firms, high-growth businessesHigher-rated, established borrowers.
Deal StructureBespoke, customised, structured financingStandardised loan products
FlexibilityHigh flexibility in terms, covenants, and structuringRestricted by regulatory norms and rigid approval processes
Returns Higher yields (approx. 10–25%)Lower yields (traditional fixed-income)
Risk LevelHigher risk due to borrower profile and limited diversificationLower risk due to stronger credit profiles and diversified portfolios
RegulationLight SEBI AIF regulations; fewer lending restrictionsHeavily regulated by RBI and sector-specific norms
LiquidityClosed-ended funds; limited exit optionsMore liquid; established repayment structures; some products have secondary markets
DiversificationLimited number of deals; concentrated portfoliosBroad, diversified loan books
Role in MarketFills credit gaps not served by traditional lendersCore credit providers in the financial system

Table 1: Differences between private credit and traditional credit

How Much of it is in India?

Global private credit assets under management have quadrupled over the past decade to US$2.1 trillion in 20234. Compared with the rest of the world, the private credit market in India is very small, with estimated assets under management of $25 billion to $30 billion as of March 31, 2025, representing about 0.6% of India’s GDP and 30-35% of the total investments made by AIFs in India.5

Figure 1: Private credit share (1%) as a part of overall corporate lending. Source: RBI, AMFI

Figure 2:  Size of Private Credit Market. Source: RBI

Reasons for Rise in Private Credit?

Private credit is expanding rapidly because it steps in where traditional banks hesitate. It provides capital for last-mile project completion, cost overruns and promoter equity infusion; areas that fall outside the comfort zone of regulated lending. The asset class has also delivered consistently higher risk-adjusted returns, a compelling draw for global and domestic investors, especially through long phases of low interest rates.6

A key advantage lies in its flexibility. Private lenders can tailor covenants7, link returns to cash flows and restructure repayment terms during stress, offering a level of customisation that conventional bank credit cannot match. For investors, this translates into both diversification and access to high-growth segments that remain beyond the scope of mainstream credit markets.

Sector specific regulatory gaps: There is a concern that tighter bank regulation will continue to encourage the migration of credit from banks to private credit lenders8. Certain regulatory restrictions on banks directly push borrowers toward private credit:

  1. Real estate: Banks cannot lend for land acquisition (Para 3.3.1, Master Circular – Housing Finance), leading to real estate becoming a major private-credit segment, accounting for about one-third of all private credit deals.9
  1. Mergers & acquisitions: Banks are not expected to lend to promoters for acquiring shares of other companies (Para 2.3.1.6, Master Circular – Loans and Advances). Consequently, 35% of private credit deals involve M&A financing. However, RBI’s Draft Directions on Acquisition Finance proposes to somewhat ease this restriction.10

Apart from the above, The IBC significantly strengthened creditor rights and recovery prospects, boosting confidence among lenders and supporting the growth of private credit. At the same time, many borrowers, particularly smaller firms, those with weak earnings, high leverage or insufficient collateral, struggle to access bank loans making private credit a natural alternative11. This shift was further accelerated by an extended period of low global interest rates, which pushed investors to seek higher-yielding opportunities and increased capital flows into private credit strategies.

The most common structure for channelising private credit is an AIF – more specifically, a Category II AIF. A ‘Private Credit AIF’ is essentially an AIF whose primary investment strategy is direct debt financing (by investing in debt instruments) to borrowers outside the conventional banking/syndicated loan market. Since AIFs are not subject to the same regulatory framework as traditional lenders (for example, no deposit-taking, no CRR/SLR requirements etc.), they can offer tailor-made structures such as step‐up interest rates, bullet repayments, equity warrants, convertible features, etc. 

A private credit fund requires long-term, stable capital, and frequent redemption demands can disrupt lending strategy. A closed-ended Category II AIF structure suits this model well, as it locks in investor capital for the fund’s life and prevents premature withdrawals. Private credit deals are idiosyncratic and difficult for outside parties to value or trade, lenders typically rely on long-term pools of locked-up capital for financing. One advantage AIFs have over mutual funds is that mutual funds are restricted to investing only up to 10% of their debt portfolio in unlisted plain vanilla NCDs.

Compared to private equity or venture capital, where performance depends heavily on market conditions and timing exits, private credit offers returns that are largely predetermined by contract. The trade-off, however, is that like most AIFs, these investments typically come with multi-year lock-ins and fewer exit opportunities, underscoring their inherently illiquid nature. Typically, investors which can commit long term capital are well-suited to invest in such AIFs – such as pension funds and sovereign wealth funds etc.

Regulatory Concerns with Growth of Private Credit?

IMF in its 2024 Global Financial Stability Report highlighted risks w.r.t rise in private credit since its growth comes with several structural weaknesses that make the market vulnerable, especially in a downturn. Its rapid expansion is happening largely outside traditional regulatory oversight and because the market has not been stress-tested, the true scale of risk remains unclear. Borrowers tend to be smaller and more leveraged and with most loans being floating-rate, repayment stress can escalate quickly when interest rates rise. Although private credit funds’ leverage appears low compared with other lenders, end borrowers tend to be more highly leveraged than those in public markets, increasing the risks to financial stability.12

Instruments such as PIK interest13 only defer the problem, increasing loss severity if performance deteriorates. Liquidity is another pressure point since private credit funds are inherently illiquid. Risk is further amplified by layers of hidden leverage, at the borrower, SPV, investor and fund level making contagion hard to track. Layers of leverage are created by the AIF lending against equity to a holding entity, which infuses the equity into an operating company, and the operating company borrowing against such equity.

Because loans are private, unrated and rarely traded, valuation is opaque and losses may remain masked until too late. Growing competition also risks weakening underwriting standards and covenant discipline, particularly as larger banks participate in private deals.

Practical challenges add to this vulnerability. Collateral enforcement may not always hold up legally, say due to restrictions on transferability of collateral (say, shares of a private company). Equity-linked security is volatile as well, and during distress, equity tends to lose its value almost completely. In essence, private credit offers flexibility and returns, but its opacity, leverage, illiquidity and weaker borrower profiles create risks that could surface sharply in stress conditions. Private credit certainly warrants closer attention. Nonbank lenders, especially private credit funds, have grown rapidly in recent years, adding to financial stability risks because they are less transparent and not as firmly regulated.

Do private credit AIFs create any regulatory arbitrage?

What you cannot do directly, you cannot do indirectly – the age-old maxim might apply in case a RE which is otherwise barred by RBI for an object, uses the AIF route to achieve that object. Below we examine some of the distinctions in the regulatory oversight: 

FunctionPrivate Credit AIFsRE
Credit & Investment rules
Credit underwriting standardsNo regulatory prescriptionNo such specific rating-linked limits. However, improper underwriting will increase NPAs in the future.
Lending decisionManager-led

Investment Committee under Reg. 20(7) may decide lending

Manager controls composition of IC;

IC may include internal/external members;

IC responsibilities may be waived if investor commitment ≥₹70 Cr w/ undertaking
Primarily i.e. the main thrust should be in:
– Unlisted securities; and/or
– Listed debt rated ‘A’ or below		Lending decisions guided by Board-approved credit policy
Exposure normsMax 25% of investible funds in one investee company.Exposure is limited to 25% of Tier 1 Capital per borrower and 40% per borrower group for NBFC ML;

No such limit for NBFC BL.

Banks can lend maximum upto 15% of their Tier 1 + Tier 2 capital to a single borrower. Large exposure norms may apply in case of banks and Upper Layer NBFCs
End-use restrictionsNone prescribed under AIF Regulations, results in high investment flexibilityBanks cannot lend for land acquisition or for funding a M&A deal [refer ‘sector-specific regulatory gaps’ above]
NBFCs do not have any such restrictions. They do have internal limits on sensitive sector exposures which includes capital market and commercial real estate [See Para 92 of SBR]
Related party transactionsNeed 75% investors consent [reg 15(1)(e)]Board approval mandatory for loans ≥₹5 Cr to directors/relatives/interested entities;

Disclosure + abstention from decision-making;Loans to senior officers requires Board reporting [See para 93 of SBR]
Capital, Liquidity & Leverage Requirements
Capital requirementsNo regulatory prescription as the entire capital of the fund is unit capitalMinimum net owned funds of ₹10 Cr, CRAR 15% for NBFC-ML and above [See para 133.1 of SBR]9% CRAR in case of banks, 
Liquidity & ALMUninvested funds may be parked in liquid assets (MFs, T-Bills, CP/CDs, deposits etc.) [15(1)(f)] NBFC asset size more than 100 Cr. have to do LRM [Para 26]
Leverage limitsNo leverage permitted at AIF level for investment activities
Only operational borrowing allowed		Leverage ratio of BL NBFC cannot be more than 7
No restriction on NBFC ML however, CRAR of 15% makes results into leverage limit of 5.6 times 
For Banks, in addition to CRAR,  there is  minimum leverage ratio is 4%
Monitoring, Restructuring and Settlements
Loan monitoringNo regulatory prescriptionRBI-defined SMA classification, special monitoring, provisioning & reporting.
Compromise & settlementsNo regulatory prescriptionGoverned by RBI’s Compromise & Settlement Framework
Governance, Oversight & Compliance
Governance & oversightOperate in interest of investors
Timely dissemination of info
Effective risk management process and internal controls
Have written policies for conflict of interest, AML.
Prohibit any unethical means to sell/market/induce investors
Annual audit of PPM termsAudit of accounts 
15(1)(i) – investments shall be in demat form 
Valuation of investments every 6 months		A Risk Management Committee is required for all NBFCs. [See para 39 of SBR]
AC [94.1], NRC [94], CRO [95] ID and internal guidelines on CG [100] required for NBFC-ML and above 
Diversity of borrowersPrivate credit AIFs usually have 15-20 borrowers.Far more diversified  as compared to AIFs
Pricing Freely negotiated which allows for high structuring flexibilityGuided by internal risk model

Table 2: Differences in regulatory oversight between AIFs and Regulated Entities (REs)

The core difference between private credit AIFs and RBI-regulated lenders lies in regulatory intent. SEBI is a disclosure-driven market regulator, it relies on transparency, governance and informed investor choice. RBI is a prudential regulator tasked with protecting systemic stability, and therefore imposes capital buffers, exposure limits and stricter supervision. Private credit AIFs operate within SEBI’s lighter, disclosure-based approach, while banks and NBFCs function under RBI’s risk-averse framework. This does not always create arbitrage, but it does allow credit activity to grow outside the prudential perimeter. As private credit scales, a coordinated SEBI-RBI framework may be necessary to preserve flexibility without compromising financial stability. 

It is important to recognise that Category I and Category II AIFs are prohibited from taking long-term leverage. As a result, any loss arising from their lending or investment exposures does not cascade into the wider financial system. Therefore, concerns around applying capital adequacy requirements to these AIF categories are largely unwarranted.

Conclusion

Though still a small fragment of India’s wider corporate lending landscape, private credit AIFs are steadily gaining ground reaching those nooks and crannies of credit demand that banks and NBFCs often cannot, or would not, serve. Their ability to operate beyond the traditional comfort zone of regulated lenders is what makes this segment structurally relevant and increasingly attractive to borrowers and investors alike.

At the same time, rapid expansion brings the potential for regulatory arbitrage. The RBI has already acknowledged this risk, most notably through its actions on evergreening via AIF structures, ultimately resulting in exposure caps of 10% for individual regulated entities and 20% collectively, along with mandatory full provisioning where exposure exceeds 5% in an AIF lending to the same borrower. These measures serve as guardrails to prevent private credit vehicles from functioning as an indirect tool for evergreening of loans. 

  1. IMF Global Financial Stability Report 2024 ↩︎
  2. Ibid ↩︎
  3. A middle-market firm is a firm that is typically too small to issue public debt and requires financing amounts too large for a single bank because of its size and risk profile. The size of middle-market firms varies widely. In the United States, they are sometimes defined as businesses with between $100 million and $1 billion in annual revenue. ↩︎
  4. IMF Global Financial Stability Report 2024 and Federal Reserve Note dated May 23, 2025 ↩︎
  5. India’s private credit market is coming of age: S&P Global and SEBI Data ↩︎
  6. RBI’s Financial Stability Report June 2024 ↩︎
  7. Customized lending terms can include, for example, the option to capitalize interest payments (that is, pay in kind) in times of poor liquidity ↩︎
  8. Cai and Haque 2024 ↩︎
  9. India’s private credit market is coming of age: S&P Global ↩︎
  10. See our article ‘Draft RBI Directions: Banks may finance Acquisitions’ ↩︎
  11. Chernenko, Erel, and Prilmeier 2022 ↩︎
  12. Growth in Global Private Credit: Reserve Bank of Australia ↩︎
  13.  Payment-in-kind (PIK) is noncash compensation, usually by treating accrued interest as an extension of the loan. ↩︎

See our other resources of Alternative Investment Funds here

New NBFC Regulations: A ready reckoner guide

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-Team Finserv | finserv@vinodkothari.com

From 28th Nov 2025, all RBI regulated entities are governed by a completely new set of regulations.

We provide a complete comparative snapshot of the familiar old regulations and the new avatars. We have also shortlisted the changes, if any, as also commented for your comfort where there are no changes from the earlier regime.

Actionables: While there are rarely any significant substantive changes, however, REs may, at an early date, bring this major rewriting exercise to the knowledge of their boards, and proceed to make consequential changes in policies, SOPs, etc.

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Other Resources on the topic:

a. Old Rules, New Book: RBI consolidates Regulatory Framework

The Hidden Hand: Understanding Beneficial Ownership in case of Trusts

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Saket Kejriwal, Assistant Manager | corplaw@vinodkothari.com, finserv@vinodkothari.com

Background

The structure of a trust inherently creates a separation of roles, typically involving three distinct parties viz. the author/settlor, trustee, and beneficiaries. While the control/operations rests with the trustee, economic benefit lies with the beneficiaries, and the settlor may continue to exert influence through the trust deed or reserved powers, thus  making it difficult to clearly identify who actually “owns” or “controls” the trust. This intrinsic separation of legal control, economic interest and potential influence renders trusts far more opaque than other conventional structures like companies or partnerships. What makes the structure even more complicated is that trusts are mostly governed by 19th century laws. Trusts are not required to publicly file information about their beneficiaries; in many cases, trustees may even contend that they are not maintaining any such regular list.

Adding to this complexity is the fact that trusts may be structured in different forms. Based on the degree of control with the trustees,  trusts may be discretionary, where the trustee has full discretion to identify the beneficiaries and/or their share, or non-discretionary, where the beneficiaries have identifiable and predetermined rights in the trust property.There are trusts where the determination of beneficiaries is either contingent or future – for example, children and grandchildren of the settlor. In discretionary trusts, beneficiaries may not have a defined share or enforceable claim at any given point, making it unclear whether they can be treated as beneficial owners at all. In non-discretionary trusts, although the beneficiaries are identifiable, the trustee continues to hold legal title, again blurring the line of who truly “owns” the trust.

For Reporting Entities1 (“REs”), including Banks and NBFCs, identification and onboarding becomes more complex when the customer is a non-individual entity. The extent of verification varies by entity type, and trusts in particular create added challenges because of the reasons cited above.

Relevance of Identifying Beneficial Owners (‘BO’)

Before discussing how REs should identify a trust’s BO, it is important to understand why they must do so. Under para 9 and 10 of the RBI KYC Directions, 2016, every regulated entity is required to frame a Customer Acceptance Policy which, at a minimum, mandates that no account-based relationship or transaction may be undertaken unless full Customer Due Diligence (‘CDD’) is completed. The same is based on R.10 of The FATF Recommendations.

As defined under para 3(b) Clause (v) of RBI KYC Directions, 2016, “Customer Due Diligence means identifying and verifying the customer and the beneficial owner using reliable and independent sources of identification”. Further, clause 3 under explanation to the above para extends this requirement to “Determining whether a customer is acting on behalf of a beneficial owner, and identifying the beneficial owner and taking all steps to verify the identity of the beneficial owner, using reliable and independent sources of identification.”.  Similar to what is prescribed under Rule 9(1) of PML Rules, 2005. 

As part of CDD, REs are required to identify customers and their BOs, which in turn places a corresponding obligation on customers to truthfully disclose their ownership structure and furnish relevant documents that establish the identity of a natural BO. This process obliges REs to verify the authenticity and completeness of the information and documents submitted, use these findings to determine whether to establish the business relationship and to appropriately assign a risk rating.

However, in practice, BOs may be reluctant to provide their KYC documents due to privacy concerns, fear of scrutiny, or because complex structures were intentionally designed to keep the BO’s identity concealed. 

Who are ‘beneficial owners’?

As per para 3(a)(iv) clause (d) of RBI KYC Directions, “Where the customer is a trust, the identification of beneficial owner(s) shall include identification of the author of the trust, the trustee, the beneficiaries with 10 percent or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership”. A similar definition is provided under Rule 9(3) of PML Rules, 2005.  

Aforesaid definitions originates from The FATF Recommendations which clearly defines that in context of legal arrangements i.e. Trust, beneficial owner includes: “(i) the settlor(s); (ii) the trustee(s); (iii) the protector(s) (if any); (iv) each beneficiary, or where applicable, the class of beneficiaries and objects of a power; and (v) any other natural person(s) exercising ultimate effective control over the arrangement. In the case of a legal arrangement similar to an express trust, beneficial owner refers to the natural person(s) holding an equivalent position to those referred above.” 

In a discretionary trust, the trustee has full discretion, whereas in a non-discretionary trust, beneficiaries have fixed rights and the trustee has limited discretion. This influences who can practically be identified as exercising control.

Now, in the case of a discretionary trust, the above framework is usually manageable because the trustee, who exercises control, may not object to being identified as a BO. However, in a non-discretionary trust, the trustee does not exercise independent discretion. In such cases, the trustee may express reluctance to be classified as a BO because he does not “benefit” from the trust in an economic sense and may view BO identification as an unwarranted extension of responsibility. This confusion often results from equating BO with someone who derives economic benefit, whereas under AML laws the emphasis is on identifying at least one identifiable individual, ensuring that there is an accountable natural person whom authorities and REs can pursue in the event of ML/TF concerns, regardless of whether they receive monetary benefit.

Difference between BO and Beneficiary

It is important to understand that the terms “beneficiary” and “beneficial owner” serve different purposes. The objective of identifying the BO is not to treat the trustee or settler as recipients of trust benefits, but to ensure that the RE can clearly trace the natural persons involved in controlling, directing, and/or benefiting from the trust arrangement. BO identification is a regulatory requirement aimed at preventing misuse of trusts for ML/TF purposes, not a determination of who is entitled to trust assets. When viewed this way, trustee and settler identification becomes a matter of transparency and risk assessment, not a reclassification of their legal or economic rights under the trust.

Identification of the natural person behind the Trust

REs typically encounter two scenarios that require them to look behind the trust structure, first, when the trust is the direct customer, second, when the trust is recognised as a BO of another entity.

  • Trust itself is the customer

When the trust itself is the customer, the BO identification framework is relatively straightforward. The PML Rules clearly prescribe that the following individuals must always be treated as BOs:

  • the author/settlor,
  • the trustee(s), and
  • any beneficiary holding 10% or more interest, where such interest is defined or quantifiable.

These natural persons fall squarely within the definition of beneficial owners and should be identified and verified without debate.

Where specific beneficiaries cannot be identified, for example, in a public charitable trust, or in a private trust where beneficiaries do not meet the 10% threshold, the obligation to identify BOs does not fall away. In such cases, the RE must still identify:

  • the author/settlor,
  • the trustee(s), and
  • any natural person exercising ultimate effective control, if any, .

Thus, the absence of identifiable beneficiaries does not dilute the requirement. 

  • Indirect Identification (Trust as a BO / Shareholder / Partner of Another Entity)

Complexity increases when the customer is not the trust, but another legal entity, such as a company, LLP, or partnership, in which a trust holds a substantial stake. In such cases, identifying the natural person as BO requires a deeper “look-through” analysis.

The Interpretive Note to Recommendation 10 of The FATF Recommendations provides a structured cascading approach to determine BOs of legal persons. This approach should be applied sequentially2:

Step 1: Identify the natural persons with controlling ownership interest 

Determine whether any natural person ultimately owns or controls the entity through direct or indirect ownership (including ownership via the trust), if yes, identify the person(s) as BO.

Step 2: Identify natural persons exercising control through other means

If no natural person is identifiable through ownership, identify the natural persons exercising control of the entity through other means, such as through one or more juridical persons.

In such cases, the BO definition for trusts should not be imported from the definitions as discussed above i.e. all parties to the trust need not automatically be treated as BOs of the entity concerned.

Instead, the focus should be on identifying the natural person(s), whether trustee or settlor, who genuinely hold or exercise the relevant control over the underlying company, and evaluating them against the test of control.

Step 3: Identify the Senior Managing Official (SMO)

If no natural person can be identified under Step 1 or Step 2, the reporting entity must identify and verify a Senior Managing Official of the customer entity itself.

Intent behind this clause, might be to cater to conditions where the legal person is held by another legal person which is, in turn, held by a trust or where the trust is a charitable trust with no identifiable beneficiaries and no effective control exercised by the trustee, the chain may not yield any natural person with a controlling ownership or control interest. In such situations, the responsibility reverts to the customer entity itself, and the senior managing official (SMO) of the customer is identified as the BO for CDD purposes.

However, even in such cases, the SMO is identified purely for the purposes of AML laws, as discussed above. (see para 31 of the FATF Guidance on Beneficial Ownership of Legal Persons). 

Difference between BO and SBO

While the concept of a BO and the concept of a Significant Beneficial Owner (SBO) under the Companies Act both aim to identify the natural persons behind an entity, the two frameworks differ significantly in scope and approach. The SBO definition focuses on identifying individuals who hold a prescribed level of ownership or control, and it does not provide a structured fallback if no individual meets that threshold. 

In contrast, the BO identification under the Rule 9(3) PML Rules follows a cascading approach i.e. REs must first identify natural persons with ownership, then those who exercise control through other means. Further, only when neither approach detects a clear individual do the rules require identifying the senior managing official as the BO of last resort. This ensures that BO identification cannot be left blank, every entity must ultimately map to a natural person for AML purposes, even where no SBO exists, so that transactions are not carried out in benami or opaque structures.

Conclusion

It is important to clarify that being identified as a BO is primarily a regulatory formality for compliance. It does not alter a person’s rights, liabilities, or relationship with the trust or entity. The core objective is simply to ensure that there is a clearly identifiable natural person connected to the legal entity so that the RE can complete its due diligence and satisfy ALM requirements. Following are the limited obligations of being identified as a BO: 

  • Provide basic KYC documents or Official Valid Document (OVDs) for verification of identity;
  • Respond to any follow-up queries during onboarding or monitoring; and 
  • Undergo periodic KYC updates, as requested by the RE.
  1.  As per Section 2(wa) of PMLA Act, 2002 “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.
    ↩︎
  2.  Refer footnote no. 37 of The FATF Recommendations ↩︎

Operational Risk Assessment for NBFCs : Understanding The Basics

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Simrat Singh | finserv@vinodkothari.com 

Operational risk, as defined by the Basel framework, refers to the possibility that a financial institution’s routine operations may be disrupted due to failures in processes, systems, people, or external events. While historically treated as secondary to credit and market risk, it has increasingly become a central focus of risk management, particularly for institutions with complex operations, heavy technology dependence, extensive outsourcing, and stringent regulatory obligations. Reflecting this shift, the RBI’s 2024 Guidance Note on Operational Risk Management and Resilience expands its expectations for operational risk management to all NBFCs. 

Having previously discussed the guidance note (refer here), this article now explains the fundamentals of operational risk assessment and outlines its process.

Operational Risk Management

Operational risk poses unique challenges because many of the events that cause losses arise from internal factors, making them difficult to generalise or predict. Large operational losses are often viewed as rare, which can make it difficult to get sustained management attention on the steady, routine work required to identify issues and track trends1. Operational risks typically stem from people, processes, systems and external events, ironically, the same resources essential for running the business. Unlike credit and market risk which are modelled and hedged, operational risks are often idiosyncratic, event-driven and subject to human, process and system failure.

Relevance For Financial Institutions

Financial institutions operate with complex processes, large transaction volumes, strict regulatory reporting requirements and often heavy dependence on technology, outsourcing arrangements and third-party service providers. Because of this, operational failures, such as system glitches, fraud, compliance breaches or breakdowns in business continuity, can result in substantial financial losses, regulatory sanctions, reputational harm and other disruptions to business operations. 

Given these risks, regulators have placed growing emphasis on the measurement and management of operational risk. Based on our experience, RBI has frequently raised queries regarding the operational risk frameworks of NBFCs during its supervisory inspections. Under Basel II, for instance, banks using the Advanced Measurement Approach were required to maintain strong, demonstrable operational risk management systems. Recognising the importance of operational risk, the Bank of England’s FSA0732 report, which is applicable on banks and large investment firms, requires firms to record the top ten operational risk loss events for each reporting year. This provides a clear view of what went wrong, where it occurred and the scale of the financial impact.

Operational Risk Assessment Process

In its guidance note for operational risk, RBI at many places underscored the importance for risk assessment. One such example is given below:

Principle 6: Senior Management should ensure the comprehensive identification and assessment of the Operational Risk inherent in all material products, activities, processes and systems to make sure the inherent risks and incentives are well understood. Both internal and external threats and potential failures in people, processes and systems should be assessed promptly and on an ongoing basis. Assessment of vulnerabilities in critical operations should be done in a proactive and prompt manner. All the resulting risks should be managed in accordance with operational resilience approach.

6.1 Risk identification and assessment are fundamental characteristics of an effective Operational Risk Management system, and directly contribute to operational resilience capabilities. Effective risk identification considers both internal and external factors. Sound risk assessment allows an RE to better understand its risk profile and allocate risk management resources and strategies most effectively.

Figure 1: Operational Risk Assessment Process

Risk identification

Risk identification means figuring out what exactly you need to assess. It involves recognising the different risk sources and risk events that may disrupt your business. A risk source is the underlying cause, something that has the potential to create a problem. A risk event is when that problem actually occurs. For example, a weak password is a risk source, while a data breach caused by that weak password is the risk event. 

As per the RBI’s Guidance Note, REs are expected to take a comprehensive view of their entire “risk universe”. This means identifying all categories of risks, traditional or emerging, that could potentially affect their operations. These may include insurance risk, climate-related risk, fourth- and fifth-party risks, geopolitical risk, AML and corruption risk, legal and compliance risks, and many others. The underlying expectation is simple: an RE should systematically identify everything that can go wrong within its business model, processes, people, systems, and external dependencies, and ensure that no material source of risk is overlooked.

There are many ways to identify risks. You may use questionnaires, self-assessments by business or functional heads, workshops with staff involved in risk management, or you may review past failures within the company. Industry reports, experiences of peers, and linking organisational goals to potential obstacles can also reveal important risks. You can even look at upcoming strategic initiatives and think ahead about the risks that may arise when these changes are implemented.

Every organisation has its own risk profile. A lender may worry about borrowers not repaying, untrained staff, biases in an AI underwriting model, IT system failures, employee fraud, or suppliers not delivering on time. These risks should be recorded in a risk register, but it is important that this register reflects your business. A company offering only physical loans may not face digital lending risks, and should not simply copy any generic list. The goal is to identify risks that genuinely matter to your day-to-day operations.

Assessment

Once you know which risks matter, the next step is to assess each of them. For every risk, ask yourself two basic questions: 

  1. What is the likelihood of this risk actually happening? This is simply the chance that the event might occur; You may assign parameters to determine the likelihood – for eg if the risk event is almost certain to occur in the next 1 year or is it likely to occur or it will occur only in remote situations?

Figure 2: Illustrative likelihood assessment criterias

  1. If it does happen, what impact will it have on my organisation? Will it hurt my reputation? Lead to financial loss? Negative feedback from customers? Cause a data leak? One can record the impact of the risk as High, medium or low based on its gravity

Figure 3: Illustrative impact assessment of risks

These two questions help you understand how serious the risk is inherently (inherent risk level) i.e, before considering whether you have any controls in place. Note that at this stage, you’re only interested in the natural level of risk that exists ignoring any controls you might already have. 

Evaluating Controls

Once the inherent risks are understood, the next step is to look at how these risks are currently being managed. These risk-reducing efforts are your controls or mitigation measures. Controls are simply the actions, checks, or processes already in place to lower the likelihood or impact of a risk. For example: Is your underwriting model checked for bias? Are board committees meeting regularly? Do you have proper maker–checker checks in your V-CIP process? Controls can take many forms such as policies, procedures, tools, system checks, reviews, or even day-to-day practices followed by employees. In essence, a control is any measure that maintains or modifies risk and helps the organisation manage it more effectively. 

Residual Risk

After evaluating the controls, you can determine the residual risk i.e. the level of risk that remains even after your mitigation measures have been applied. Residual risk shows whether the remaining exposure is acceptable or whether additional controls are needed. By definition, residual risk can never be higher than inherent risk. Generally, residual risk can be interpreted as follows:

  • Low Residual Risk: When the effectiveness of internal controls fully covers or even exceeds the inherent risk;
  • Medium Residual Risk: When controls reduce most of the risk, leaving only a small gap;
  • High Residual Risk: When controls address only part of the risk and a significant gap still remains;
CategoryRisk SourceRisk eventRoot causeLikelihoodConsequenceLevel of inherent riskControl EffectivenessLevel of Residual Risk
People RiskEmployees / StaffEmployee fraud, misappropriation, or collusionWeak internal controls, poor background checksHighly LikelyMediumHighWeakHIGH
Information Technology & Cyber RiskIT Infrastructure / SystemsSystem downtime or core platform failureServer outage, inadequate IT resiliencePossibleLowLowStrongLOW
Process & Internal Control RiskOnboarding / KYC ProcessesNon-compliance with KYC or onboarding proceduresInadequate verification, manual errorsPossibleHighHighAdequateMEDIUM
Legal & Compliance RiskOutsourcing / LSP ArrangementsNon-compliance in outsourcing / LSP arrangementsWeak SLA oversight, inadequate due diligenceUnlikelyLowLowAdequateLOW
External Fraud RiskBorrowers / External PartiesBorrower fraud – identity theft, fake borrowers, or collusionForged documents, weak KYCPossibleLowLowStrongLOW
Model / Automation / Reporting RiskData Aggregation / SystemsFailure in data aggregation across systems for regulatory returnsSystem inconsistencies, poor data governanceHighly LikelyMediumHighStrongLOW
Reputation Risk / Customer ExperienceCustomer Communication / Sales PracticesMiscommunication of terms or conditions to customersPoor training, unclear communication scriptsPossibleMediumMediumWeakMEDIUM

Figure 5: An illustrative Snapshot of Operational Risk Assessment

Understanding residual risk helps decide where further action is required and where the organisation may still be vulnerable.

Conclusion

The goal, therefore, is to move away from a simple “tick-box” approach and make the operational risk assessment truly tailored to the organisation. For ML and above NBFCs, the ICAAP requirement to set aside capital for operational risk is useful, but it covers only a narrow part of what operational risk really involves. A comprehensive assessment goes much further by examining the strength of the entity’s internal controls and how effectively they manage real-world risks. If the residual risk exceeds the organisation’s tolerance level, it should trigger a closer look at those controls and prompt corrective action. Ultimately, the focus should be on building a risk framework that is meaningful, proactive, and aligned with how the organisation actually operates. The ultimate goal is therefore to develop ‘operational resilience’ which as per Bank of England3 is the ability of firms and the financial sector as a whole to prevent, adapt, respond to, recover from, and learn from operational disruptions.

Our other resources on risk management:

  1. Analysing Banking Risk: World Bank ↩︎
  2. FSA073: Instruction ↩︎
  3. Operational resilience of the financial sector: Bank of England ↩︎

RBI Trade Relief Directions: How is your company impacted?

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– Team Finserv | finserv@vinodkothari.com

Call it Trump relief! The RBI announced relief measures on the 14th Nov to help the exporters of certain specified items, who may have availed export credit facilities from a regulated lender, whereby all regulated entities (REs) “may” provide a moratorium, from 1st September 2025 to 31st December, 2025. The grant of such a relief shall be based on a policy, consisting of the criteria for grant of the subject relief, and such criteria shall be disclosed publicly. Not only this, REs shall also make a fortnightly disclosure of the reliefs granted to eligible borrowers on a RBI format on Daksh portal.

The Reserve Bank of India (Trade Relief Measures) Directions, 2025 (‘Directions’) are applicable to NBFCs and HFCs as well. This is accompanied with amendment to Foreign Exchange Management (Export of Goods and Services) (Second Amendment) Regulations, 2025 for extension of the period for both realization/repatriation of export value (from 9 to 15 months) and the shipment of goods against advance payment (from 1 to 3 years).

Highlights:

  • Whether your company grants an export credit or not, if your borrower is the one who has availed export credit for export of specified goods or services, the borrower may approach you for the moratorium.
  • Are you bound to grant the moratorium? Answer is, no. However, basis a policy which is publicly hosted, you will consider the eligibility of the borrower. The relevant factors on which the eligibility will be examined may also form a part of the policy, and ideally, should include the extent of dependence on exports of specified items to the USA, tariff-based disruption in the cashflows, alternative markets and transitioning possibilities, etc.
  • Effective: Immediately. 
  • Actionables: (a) Framing of policy to consider the eligibility of affected borrowers; (b) Hosting the policy on public website; (c) Creating mechanism for receiving and transmission of borrower requests for the moratorium and giving timely responses to the same (d) RBI fortnightly reporting.

What is the intent?

To mitigate the disruptions caused by global headwinds, and to ensure the continuity of viable businesses.

Tariff impositions by the USA are likely to impact several exporters. There may be a ripple effect on penultimate sellers or other segments of the economy as well, but the intent of the Trade Relief Directions seems limited to the direct exporters only.

Which all regulated entities are covered?

The Directions are applicable to following entities:

  • Commercial Banks
  • Primary (Urban) Co-operative Banks, State Co-operative Banks and Central Co-operative Banks
  • NBFCs
  • HFCs
  • All-India Financial Institutions
  • Credit Information Companies (only with reference to paragraph 16 of these Directions).

Does it matter whether the RE in question is giving export credit facilities or not? In our view, it does not matter. The intent of the Directions is to mitigate the impact of trade disruptions. Of course, the borrower in question must be an exporter, must have an export credit facility outstanding as on 31st Aug 2025, and the same must be standard.

If these conditions are met, then the RE which holds the export credit, as also other REs (of course, the nexus between the trade disruption and the servicing of the credit facility will have to be seen) should consider the borrower for the purpose of grant of relief.

Relief may or may not be granted. 

Policy on granting relief

The consideration of the grant of relief will be based on a policy. 

Below are some of the brief pointers to be incorporated in the policy: 

  1. Purpose and Scope: define which loan products, sectors, or borrower categories are covered; effective period for granting relief
  2. Eligibility Criteria for borrowers
  3. Assessment criteria for relief requests received from the borrowers
  4. Authority responsible for approving such request
  5. Relief measures that can be offered to borrowers
  6. Impact on asset classification and provisioning
  7. Disclosure Requirements
  8. Monitoring and Review: Authority which is responsible for monitoring such accounts; periodicity of review

How is the assessment of eligible borrowers to be done?

In our view, the relevant information to be obtained from the candidates should be:

  • Total export over a relevant period in the past, say 3 years
  • Break up of export of “impacted items” and other item
  • Of the above, exports to the USA
  • Gross profit margin
  • Impact on the cashflows
  • Information about cancellation of export orders from US importers
  • Any damages or other payments receivable from such importers
  • Any damages or other payments to be made to the penultimate suppliers
  • Alternative business strategies – repositioning of markets, alternative buyer base, etc
  • Cashflow forecasts, and how the borrower proposes to pay after the Moratorium Period.

What sort of lending facilities are covered?

Please note the following from the preamble: “mitigating the burden of debt servicing brought about by trade disruptions caused by global headwinds and to ensure the continuity of viable businesses”. Therefore, clearly, the relief intended here is one where “trade disruptions” create such a burden on debt servicing, which may impact the viability of the business.

From this, it implies that the entity in question must be a business entity, and the loan in question should be a business loan. 

In our thinking, the following facilities seem covered:

  1. Export credits of all forms, including packing credit, funded as well as unfunded, letters of credit, etc.
  2. Buyer’s credit or facilities for inward acquisitions/purchases by an exporter
  3. Cash credits, overdrafts or working capital related facilities, intended for export business of impacted items.
  4. Term loans relating to an impacted business
  5. Loans against property, where the end use is working capital

Eligible and ineligible borrowers:

Eligible borrowers:

  • Borrowers who have availed credit for export
  • Borrower had an outstanding export credit facility from a RE as of August 31, 2025 (However, in case the borrower has a sanctioned facility pending disbursement as on Aug 31, the same shall not be eligible)
  • Borrower with all REs was/were classified as ‘Standard’ as on August 31, 2025

In our view, the following borrowers/ credit facilities are not eligible for the relief:

  • Individuals or borrowers who have not borrowed for business purposes
  • Home loans or loans against specific assets or cashflows, where the debt servicing is unconnected with the cash flows from an export business
  • Loans against securities or against any other financial assets
  • Gold loans, other than those acquired for business purposes
  • Car loans, loans against commercial vehicles or construction equipment, unless the borrower is engaged in export business and the cashflows have a nexus with such business
  • Borrower is engaged in exports relating to any of the sectors specified
  • Borrower accounts which were restructured before August 31, 2025
  • Accounts which are classified as NPA as on August 31, 2025

Consider a borrower who is not an exporter himself, but an ancillary supplier, supplying to a trading house. Will such a penultimate exporter be covered by the Relief Directions? In our view, the answer is negative, as the “eligible borrowers” are defined to mean an exporter.

Impacted items and impacted markets

The list of impacted items broadly covers a wide spectrum of manufacturing and export-oriented sectors, including marine products, chemicals, plastics, rubber, leather goods, textiles and apparel, footwear, stone and mineral-based articles, jewellery and precious metals, metal products, machinery, electrical and electronic equipment, automobiles and auto components, medical and precision instruments, and furniture and furnishing items.

Is it mandatory that the borrower shall be exporting to USA? While the Directions do not specifically mandate that the borrower shall be exporting to the USA, the concerned REs should, as part of their assessment, evaluate whether the borrower genuinely requires such relief measures and, in our view, should consider the extent to which the borrower depends on exports of the specified items to the USA.

Why have HFCs been covered?

Generally speaking, the servicing of home loans is not supposed to be based on business cashflows, and therefore, the impact of trade disruptions on servicing of a home loan does not seem easy to establish.

However, HFCs grant other credit facilities too, including LAP or business loans. Therefore, there is no carve out for HFCs as such. HFCs are also expected to prepare the policy referred to above and be sensitive to requests from impacted borrowers.

Is the moratorium retrospective?

Yes, clearly, the moratorium is retrospective, as it covers the period from 1st September to 31st December. This is the range over which the moratorium may be granted; of course, the decision as to how much moratorium, within the above maximum range, is warranted in the particular case, is that of the lender. Let us call the agreed moratorium as the Moratorium Period.

If the moratorium is granted from 1st Sept., then any payments which were due for the period covered by the Moratorium Period will  not be taken as having fallen due. This will have significant impact on the loan management systems:

  • Considering that we are already in the middle of November, the day count for any payments due during the part of the Moratorium Period will be set to zero. In other words, day count will stop during the Moratorium Period. Thus, if an account was showing a DPD status of 60 days as on Aug 31, 2025, the DPD count will remain at a standstill till the moratorium period is over.
  • However, in case a borrower has made payment during the moratorium period, will the DPD count decrease or will it remain the same? 

The RBI Directions state that the days past due (DPD) count during the moratorium period will be excluded. However, this does not imply that a borrower who makes payments during this period should be denied the corresponding benefit. In our view, if a payment is received from the borrower, the DPD count should accordingly be reduced.

  • Any payments already made during the part of the Moratorium Period already elapsed may be taken towards principal, or may be held to be adjusted against the future dues of the borrower, after the Moratorium Period. This should also, appropriately, be captured in the policy.
  • Further, for accounts for which the CIC reporting has already been done on or after Aug 31, 2025, and the lender decides to extend the moratorium benefit, it must be ensured that the DPD count is revised so as to reflect the status as on Aug 31, 2025. 

Do lenders have to necessarily grant moratorium, or grant partial interest/principal relief?

The RBI Directions do not mandate REs from granting such relief measures. Accordingly, the concerned RE will need to assess individual cases based on the sectors, the need for such relief and the extent to which such relief may be granted. 

Lenders may grant full moratorium during the Moratorium Period, or may grant relief as may be considered appropriate.

Do lenders take positive actions, or simply respond to borrower requests?

The lenders must establish a policy for granting such relief measures prior to extending any relief, as the authority to do so will be derived from this policy. As discussed above, the discretion to grant relief rests with the concerned RE; therefore, each request submitted by a borrower must be evaluated on an individual basis.

For this purpose, the following information must be obtained from the borrowers seeking relief:

  1. The concerned sector and how the same has been impacted necessitating such relief
  2. Information relating to the current financial condition of the business of the borrower
  3. Facilities taken and outstanding with other REs 

Non-compounding of interest during the Moratorium Period:

Para 9 (iii) provides that while interest will accrue during the Moratorium Period, but the interest shall be simple, that is, shall not be compounded.

This may require REs to tweak their loan management systems to stop the compounding of interest during the Moratorium Period. 

However, the actual population of affected borrowers for a particular RE may be quite limited. Hence, REs may do manual or spreadsheet-based adjustments for affected borrowers, instead of making adjustments to their LMS itself.

Recomputation of facility cashflows after Moratorium:

During the moratorium period, as per the RBI directive, the lender can only accrue simple interest. Accordingly, the IRR of the credit facility will have a negative impact unlike the covid moratorium where the compound interest loss was compensated by the central government. 

Further, it has also been provided that the accrued interest may be converted into a new term loan which shall however be repayable in one or more installments after March 31, 2026, but not later than September 30, 2026. Accordingly, the accrued interest should anyhow be received by September 30, 2026.

Similar moratoriums in the past

  • Moratorium on loans due to COVID-19 disruption: Refer to our write-up here.
  • Moratorium 2.0 on term loans and working capital: Refer to our write-up here.

Our write-ups on similar topics:

India FSAP 2025: Key Takeaways and Policy Recommendations

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– Chirag Agarwal, Assistant Manager | chirag@vinodkothari.com

A joint World Bank-IMF team visited India in 2024 to update the findings of the Financial Sector Assessment Program (FSAP), which took place in 2017. World Bank on October 30, 2025 released the report1 which summarises the main findings of the mission, identifies key financial development issues, and provides policy recommendations.

We were in touch with the FSA team for our recommendations on certain aspects. The FSA recommendation on leasing (discussed below) is based on our feedback.

This article discusses in brief the key takeaways from the FSA Report.

Key Takeaways:

  1. Stronger and More Diversified Financial System: As per the report, India’s financial system has become more resilient, inclusive, and diversified since the previous 2017 assessment. Non-bank financial institutions (NBFIs) and market financing (other than from banks) now account for 44% of total financial assets—up from 35% in 2017—reflecting deeper financial intermediation beyond banks.
  2. Reforms Critical for India’s 2047 Growth Vision: The report suggests that to achieve the target of a USD 30 trillion economy by 2047, India must modernize its financial architecture to channel both domestic and foreign savings into productive investment, deepen capital markets, and attract long-term infrastructure and green financing2.
  3. Macroprudential Tools: The assessment highlights rising systemic risks due to financial diversification and interlinkages. It recommends expanding data collection and deploying macroprudential tools—including introducing Debt Service to Income (DSTI) limits across banks and NBFCs and building counter-cyclical capital buffers (CCyBs) for banks to manage liquidity, intersectoral contagion, household credit risks, and climate-related financial risks
  4. Regulatory and Supervisory Enhancements: While India’s regulatory oversight framework for banks, insurers, and markets is broadly sound, lingering issues include state influence on regulators, limited powers over governance of state-owned entities, and gaps in conglomerate and climate-risk supervision. The report suggests that efforts should be made to ensure better coordination between regulators and extending the scope of the regulatory and supervisory frameworks.
  5. Banking and NBFC Reforms: The report stresses adoption of IFRS 9, enforcing Pillar 2 capital add-ons, and elimination of prudential exemptions for state-owned NBFCs. It also suggests considering additional liquidity requirements tailored to different business models.
  6. Tax  treatment of leasing: The report suggests that to diversify MSME finance the tax treatment of leasing should be reviewed to ensure an equal treatment between lease and debt transactions. At present, interest on loans is exempted under the GST laws and hence, there is no GST levied on the loan repayments, however, the entire rentals are subject to GST in case of financial leases.
  7. Transfer of oversight function of NHB to RBI: While regulation of HFCs moved to RBI in 2019, supervision still rests with NHB, which follows a limited, compliance-based approach. Shifting supervision to RBI would strengthen oversight and remove the conflict of interest since NHB also acts as promoter and refinancer for HFCs.
  8. MSME Finance: The report recommends integrating TReDs with the e-invoicing portal for automatic invoice uploads. It also suggests incentivizing large buyers and mandating state-owned enterprises to upload invoices to improve cash flow for MSMEs. Further, the report also mentions that SIDBI’s funding support to NBFCs, including NBFC factors, should be increased, along with developing credit enhancement and guarantee facilities for NBFC bonds and MSME loan securitizations.
  1. https://documents1.worldbank.org/curated/en/099103025110514063/pdf/BOSIB-606133f7-2e00-4696-9b41-57f3737d140d.pdf
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  2. See our resources on sustainable financing: https://vinodkothari.com/resources-on-sustainability-finance/  ↩︎