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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– 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:
(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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– Anita Baid, Dayita Kanodia & Chirag Agarwal | finserv@vinodkothari.com
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-Anita Baid & Dayita Kanodia | finserv@vinodkothari.com
RBI, on May 5, 2026, came out with the draft directions on Specified Non-financial Assets (SNFA). These directions have been introduced with the intent of specifying the treatment of non-financial and non-banking assets, particularly immovable property, acquired by the lender in satisfaction of their claims on the borrower.
It is relevant to note that a common framework has been introduced for banks and NBFC, which is in contradiction to the recent consolidation approach adopted by the Department of Regulations. This could possibly also create confusion as to the treatment of non-banking assets relevant for banks, being referred to under the common framework, to be also made applicable on NBFC. In case of banks, the Banking Regulations Act prohibits banks from holding such non-banking assets (NBAs) beyond a period of 7 years, except for property acquired for own use.
Our comments on the key proposals have been provided below:
VKC comment: This would mean that movable property, like vehicles, equipment, is not being covered under the purview of these regulations. Further, the restriction on banks as provided under the BR Act to acquire any immovable assets other than assets put to its own use should not apply to NBFCs.
VKC comment: This could be practically challenging since in certain adverse situations (like fraud classification) the RE may not want to wait for the asset to turn into an NPA before repossession is done. However, practically, evaluation and classification as fraud would easily take 90 days.
Further, the fact that all other means of recovery has been explored and deemed unviable would be very subjective to establish.
VKC comment: It is understood that any compromise settlement of the dues would be done as per the extant regulations for banks and NBFCs (as the case may be) and the amount outstanding post such settlement shall be considered to determine the remaining claims, if any.
At each subsequent reporting date, the SNFA shall be carried on the balance sheet at the lower of the last available distress sale value, or the revised NBV (value of extinguished exposure, net of the notional provisions applicable had the exposure continued on the books of the RE).
VKC Comment: The accounting treatment of the SNFA should have been governed as per the provisions of the accounting standards (para 3.2.23 of Ind AS 109). There could be a possible conflict since the accounting standards require the asset to be recognised on fair value.
VKC Comment: This is consistent with the IRAC provisions which requires the RE to shift from accrual accounting to cash basis accounting upon the asset turning into an NPA.
VKC Comment: SARFAESI is applicable to NBFCs having an asset size of more than 100 crore and where the outstanding amount is a minimum of ₹20 L. Accordingly, in some cases, SARFAESI may not be applicable at all. In such cases, following SARFAESI procedures should ideally not be made mandatory.
VKC Comments: Even under IBC, 29A bars the borrower and its connected persons from bidding on the repossessed assets (except for certain exemptions in case of MSME borrowers).
the asset shall be deemed to have been employed for its own use by the RE and will be recorded as a fixed asset.
VKC Comments: It seems unclear if the RE concerned can put the assets to its own use immediately on the acquisition of such assets.
Also, read our article,
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:
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.
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) .
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
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.
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 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.
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.
– RBI’s 1st April circular bars Banks from INR-derivatives, with “related parties”, giving an Ind AS meaning to the term
In a move to maintain the integrity of INR in the evolving market conditions and avoid a potential misuse of intra-group structures to bypass regulatory constraints, the RBI has issued revised instructions on Risk Management and Inter-Bank Dealings.
Considering the prevailing situation in the currency market, RBI has prohibited banks from entering into derivatives involving INR on non-deliverable basis.
The bar extends to rebooking of any derivative contract, whether deliverable or non deliverable, entered before 1st April, maturing after this date.
The instructions prohibit any form of foreign exchange derivative contract involving INR with their related parties. Note that, the bar is not limited to “non-deliverable” contracts, rather, extends to all forex derivative contracts involving INR. This complete bar is likely to impact the financial markets where it is quite common to undertake such derivative transactions with related parties, more particularly, in banking groups constituting one or more financial sector entities (including NBFCs, insurance entities etc.).
What is even more interesting is that the meaning of “related party” for this purpose is drawn from Ind AS. Banks in India are currently not following Ind AS, and therefore, they maintain a list of related parties as per IGAAP, viz., AS 18. However, the Circular explicitly refers to Ind AS 24 or equivalent international standards. This, therefore, requires immediate action on the part of banks to draw a list of related parties, not on the basis of the accounting standards applicable to them (AS-18), but, on the basis of the widely recognised IAS-24 (Ind AS 24 in the Indian context).
The instructions refer to Indian Accounting Standard (Ind AS) 24 – Related Party Disclosures or International Accounting Standard (IAS) 24 – Related Party Disclosures or any other equivalent accounting standards. The reference thus, is not of “applicable accounting standards”, but of “equivalent accounting standards”, meaning thereby, that banks would be required to draw their list of related parties based on Ind AS 24 or its equivalent based on the country whose accounting standards are being followed by the bank in question. For instance, a foreign bank incorporated in the US will draw its definition of related party from US GAAP (ASC 850) being the equivalent of IAS 24.
-Vinod Kothari and Chirag Agarwal | finserv@vinodkothari.com
The National Credit Guarantee Trust Company (NCGTC), under the Department of Financial Services, has floated a scheme which will guarantee lending upto ₹20000 crores by banks and financial institutions (Member Lending Institutions or MLIs), for taking incremental loan exposure to MFIs. The Scheme intends to nudge bank lending to MFIs, as the former has shunned away in view of the perceived risk of the sector in the recent past. The NCGTC takes 70% – 80% risk of default of the bank loans to the MFIs, provided the lending is done accordingly with the conditions of the Scheme.
Among the conditions, the MFI must lend at least at 1% lower than the average lending rate over the last 6 months, and the MLI must lend at no more than 2% over the benchmark rate (MCLR or EBLR as applicable).
In our view, the Scheme has following outcome expectations:
Who are MLIs?
What type of loans are covered under the Scheme?
What is the interest cap under the Scheme?
What is the cap on tenure of loans under the Scheme?
Conditions for MLIs to get benefits under the Scheme:
Maximum coverage under the guarantee:
Guarantee Fee:
Claim Process:
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The RBI’s proposed relief to exempt pure investment companies from exemption from regulation is not a cakewalk but a hurdle race. It is not an exemption that comes in auto mode; you need to earn the right to be exempt. Some of the important pre-conditions that the RBI has proposed are:
| Type of NBFC | Options Available |
| NBFCs holding Type I Registration as on April 1, 2026 | Option 1: Apply for deregistration Option 2: Continue to remain as Type I NBFC |
| Entities that fulfil the conditions for Unregistered Type I NBFC, after April 1, 2026 | Option 1: Satisfy the conditions under 66A and remain unregistered [see box on Conditions Subsequent] Option 2: Apply for registration as Type I NBFC |
| NBFCs not having a customer interface and public funds and having an asset size below ₹1000 crores, but not registered as Type I | Option 1: Apply for deregistration Option 2: Apply for registration as Type I NBFC to avail regulatory exemptionOption 3: Maintain status quo |
| NBFCs not having a customer interface and public funds and having asset size above ₹1000 crores, but not registered as Type I | Option 1: Apply for registration as NBFC Type I Option 2: Apply for registration as NBFC Type II, in case of changes in business model |
Several NBFCs that have been registered with the RBI before the concept of Type 1 was introduced in 2016 may not have the CoR as a Type 1 NBFC in spite of the fact that as on date they don’t have access to public funds nor any customer interface. Such an NBFC with an asset size less than ₹1000 crores will still have an option to apply for deregistration, subject to the satisfaction of the conditions prescribed. However, such NBFCs in case they decide to maintain the status quo will not be eligible for the regulatory exemption available to Type 1 NBFCs.
If an entity carries investment activity with owned funds, within a limit of ₹1000 crores, does it need RBI registration? The answer seems to be – no. Such a company obviously does not have to go through the rigour of seeking registration first, and then qualifying for an exemption.
The company in question still has to satisfy the exemption conditions; and the auditor will need to give an exception report. The meaning of exception report is that if there is a breach of any of the conditions of exemption, or there is any breach of any other provisions of the law, the auditor shall be required to make an exception report.
Notably, CARO Order also requires auditors to comment on adherence to RBI regulations, which, in future, will include these conditions too.
Is the requirement of asset size being within ₹1000 crores based on stand-alone financial statements, or will the assets of companies within the group be aggregated, as is done for the purpose of determination of the middle layer status of companies?
It seems that the aggregation requirement is not there for the Type 1 exemption.
The basis for this is FAQ 13, which states as follows:
Q13. As per regulations of the Reserve Bank, total assets of all the NBFCs in a Group are consolidated to determine the classification of NBFCs in the Middle 11 Layer. What shall be the treatment given to ‘Type I NBFCs’ and ‘Unregistered Type I companies’ in this regard?
Ans: For aggregation purposes, the asset size of ‘Type I NBFCs’ shall be considered but asset size of ‘Unregistered Type I NBFCs’ shall not be considered. It is emphasized that ‘Type I NBFCs’ shall always be classified in Base Layer regardless of such aggregation.
Are the exemption conditions, that there is no access to public funds and no customer interface, merely a statement of intent, or must also be borne out by the conduct in any of the past 3 financial years? Looking at the definition in para 6 (14A), which reads “Not accepting public funds and not intending to accept public funds”, and likewise, “Not having customer interface and not intending to have customer interface”, it appears that the exemption conditions are both a statement of fact as well as intent. If one is negated by the fact, a mere statement of intent may not help.
However, assume there are isolated instances of intra-group loans taken or intra-group loans given. The transactions are not indicating a “business model”, at least the ones on the asset side. Are we saying that the breach of the conditions of “no public funds” and “no customer interface”, at any time during the last 3 years, will disentitle the exemption?
We do NOT think so. There are two reasons to say this:
In our view, since the deregistration application has to be made within September 30, 2026, the audited financials for FY 25-26 must have been prepared. Hence, the last three financial years that would be considered are FY 23-24, 24-25 and 25-26.
It is usually hard to get a relief from a regulator, as relief is seen as a prize that you earn. If the idea was based on the premise that what does not matter for the financial system, and is still being regulated, is a burden both for the regulator and for the regulated, there would have been a more welcoming approach to exemption. Specifically:
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