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From Consent to Compensation: RBI’s Draft Directions for REs on Sales Practices

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Highlights

  • Mis-selling, among others, will include selling an unsuitable financial product; consequences include compensation                                                                                                                               
  • Prohibition on Compulsory Bundling, eg., sale of insurance policy along with a loan
  • Explicit consent, wherever required, to be based on unambiguous affirmative action
  • Bank to do a due-diligence of a third party financial product that it markets, to avoid reputational risk
  • DSAs and DMAs of banks to come for tighter scrutiny; with undertaking for compliance with bank’s code and disciplinary action upon violation
  • Pricing difference, if any, between directly marketed bank products and indirectly (through agents) to be disclosed
  • Banks to take after-sale feedback from customers, and make necessary amendments in selling practices
  • Dark patterns not be used by regulated entities; periodic audit mandated
  • Controls over incentives favouring mis-selling
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IT Outsourcing Under the RBI’s 2025 Directions: What Has Changed?

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By Archisman Bhattacharjee & Avikal Kothari | Finserv@vinodkothari.com  

Introduction

On November 28, 2025, the Reserve Bank of India (“RBI”) issued the Reserve Bank of India (Non-Banking Financial Companies – Managing Risks in Outsourcing) Directions, 2025 (“Outsourcing Directions”), thereby repealing the erstwhile directions governing IT outsourcing and financial services outsourcing. For the purposes of this article, our discussion is confined to Chapter IV of the Outsourcing Directions, which specifically deals with outsourcing of information technology (“IT”) services. While the Outsourcing Directions largely represent a consolidation of the existing regulatory framework as also clarified by the RBI in its Consolidation of Regulations – Withdrawal of Circulars dated November 28, 2025, they also provide enhanced clarity and structure to the regulatory expectations applicable to IT outsourcing arrangements of NBFCs. This article seeks to examine whether, and to what extent, any additional or expanded obligations have been introduced by the RBI under the consolidated framework.

Applicability

Chapter IV of the Outsourcing Directions, dealing with IT services outsourcing is applicable on NBFC-ML and above, which was also the case for the Erstwhile IT Outsourcing Directions

Transitional Timeline for Compliance of Existing IT Outsourcing Arrangements

The erstwhile IT Outsourcing Directions had become applicable with effect from October 1, 2023. Under the Outsourcing Directions, the RBI has now prescribed a specific transition mechanism for existing IT outsourcing arrangements. In this regard, para 2 of the Outsourcing Directions provides that:

“These Directions shall come into force with immediate effect

Provided that for Non-Banking Financial Companies covered under the scope of these Directions, as mentioned in paragraph 3, their existing Information Technology (IT) outsourcing agreements, regardless of whether they are due for renewal on or after the effective date of these Directions, shall comply with the provisions of these Directions either at the time of renewal or by April 10, 2026, whichever is earlier.”

Given that the Outsourcing Directions are primarily in the nature of a consolidation exercise and do not introduce materially new obligations, the timeline up to April 10, 2026 appears to be intended to provide NBFCs with a reasonable window to align their existing IT outsourcing agreements with the consolidated framework. Accordingly, NBFCs should utilise this transition period to review, amend, and, where necessary, renegotiate their existing IT outsourcing contracts to ensure full compliance with the Outsourcing Directions within the prescribed timeline.

Against this backdrop, it becomes important to examine the substantive requirements laid down under Chapter IV of the Outsourcing Directions in relation to outsourcing of IT services to third-party vendors. The following section discusses the key regulatory expectations and compliance obligations applicable to NBFCs when engaging third-party service providers for IT outsourcing.

  1. Expanded scope of Service Provider Definition

The definition of “service provider” as defined under paragraph 58(3) of the Outsourcing Directions is expansive and extends beyond the primary contracting entity to include sub-contractors, third-party vendors, and entities forming part of the service delivery chain. Further the Outsourcing Directions under paragraph 58(4)have also now defined the term “sub-contractor” to mean:

“… those providing material / significant IT services to the service provider and is specific to the material / significant IT services arrangement that the NBFC has entered into with the service provider”

Accordingly, a sub-contractor that provides material or significant IT services to a service provider, where such services are critical to the delivery of the outsourced arrangement to the NBFC, would also fall within the ambit of the Outsourcing Directions. For instance, where an NBFC avails a SaaS solution from a third-party service provider, any entity that supplies core software or technology to such SaaS provider, without which the service cannot be effectively rendered, may be regarded as a material service provider for the purposes of the Outsourcing Directions. 

While the erstwhile IT Outsourcing Directions did prescribe certain obligations in respect of sub-contractors (and the obligations of NBFCs vis-à-vis their primary service providers largely remain unchanged under the Outsourcing Directions), the current framework introduces greater clarity on who qualifies as a “sub-contractor.”

Actionables for NBFCs:
NBFCs should reassess their existing IT outsourcing landscape to identify all arrangements that fall within the expanded scope, including indirect or layered service delivery models. Vendor inventories should be updated to capture not only primary service providers but also material sub-contractors and supply-chain entities involved in the provision of IT services.  Furthermore, NBFCs are advised suitably amend its existing policies to clearly specify the framework and criteria for identification of sub-contractors. This may, inter alia, include requiring service providers to furnish a list of their appointed sub-contractors along with details of the functions performed by each, and undertaking an assessment, in consultation with the relevant service provider, to determine whether such sub-contractors are material or non-material.

  1. Audit and Due Diligence 

The Outsourcing Directions require NBFCs to conduct risk-based due diligence of IT service providers, this includes tracking system performance, uptime, service availability, Service Level Agreement,  compliance and incident response on an ongoing basis. Regular risk-based audits of service providers, including sub-contractors, have been formalised, with an option to rely on pooled audits or recognised third-party certifications, though this does not dilute the NBFC’s responsibility for data security and system availability. NBFCs must also periodically review the financial and operational strength of service providers to identify any deterioration in performance, security or resilience. Access rights have been strengthened, requiring service providers to provide unrestricted access to relevant data and premises for NBFCs, auditors and regulators. 

Actionables for NBFCs:

NBFCs should strengthen vendor due diligence processes and establish mechanisms for periodic review of service providers. Oversight frameworks should extend to subcontractors and material supply-chain entities, with clear accountability resting on the primary service provider. Overall, the changes make due diligence an ongoing obligation rather than a one-time exercise, requiring NBFCs to strengthen internal monitoring structures, audit planning and vendor risk management practices. 

Further, considering that the RBI has mandated compliance of the agreements with the Outsourcing Directions by April 10, 2026, it is advisable for NBFCs to undertake a comprehensive review of the service level agreements and other contractual arrangements executed with all its material IT vendors to ensure alignment with the requirements set out under paragraphs 33, 34, 73 and 74 of the Outsourcing Directions.

Additionally, prior to April 10, 2026, NBFCs are suggested to conduct audits of its material service providers to verify:

  1. compliance with the contractual obligations agreed between the NBFC and the respective vendor; and
  2. adherence by such vendors to the applicable requirements prescribed under the IT outsourcing framework.

Alternatively, the Company may also rely on globally recognised third-party certifications made available by the service provider in lieu of conducting independent audits.

Where, based on such review or audit, the NBFC forms the view that a vendor is not in compliance with the contractual terms or applicable regulatory requirements, the NBFC should require the vendor to implement corrective action within defined timelines and, where necessary, amend or renegotiate the existing agreements to ensure alignment with the Outsourcing Directions. 

Further, the NBFC should appropriately document such reviews, audits, and remediation measures and place the same before the senior management, in accordance with the requirements of paragraph 78 of the Outsourcing Directions, and/or before such a committee as may be identified under the NBFC’s IT Outsourcing Policy. Any material or adverse developments should also be escalated to the Board in alignment with the requirements of paragraph 78 of the Outsourcing Directions.

In cases where remediation or contractual modification is not feasible, the Company should maintain an exit plan/exit strategy, including identification of alternate service providers and/or arrangements for bringing the outsourced services in-house, so as to ensure continuity of critical operations and minimal disruption to customers.

Conclusion

The Outsourcing Directions mark a significant step by the RBI towards consolidating and strengthening the regulatory framework governing IT outsourcing by NBFCs. While the underlying obligations remain broadly consistent with the erstwhile regime, the transition period up to April 10, 2026 provides NBFCs with a critical opportunity to holistically reassess their IT outsourcing arrangements, rationalise vendor ecosystems, and embed robust contractual, operational, and governance safeguards. NBFCs that proactively undertake structured reviews, strengthen vendor risk management, and institutionalise ongoing monitoring mechanisms will be better positioned not only to achieve regulatory compliance but also to enhance operational resilience and customer trust.

Ultimately, IT outsourcing under the Outsourcing Directions is no longer a purely contractual or procurement function—it is a core governance and risk management responsibility. Treating it as such will be essential for NBFCs navigating an increasingly digital and interconnected financial services ecosystem.

See our other resources:

  1. RBI regulates outsourcing of IT Services by financial entities
  2. IT Governance: Upgrade needed by April 01, 2024
  3. https://vinodkothari.com/2023/11/it-governance-risk-control-and-assurances-practices-directions-2023/

Full Day Workshop on Securitisation, Transfer of Loans and Co-lending

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The Pre-Summit workshop dated 28th May, 2026 is Sold Out! We have announce a repeat workshop on 27th May, 2026. Register your interest now before the seats fill up again!

Register Here : https://forms.gle/maTWJ2kBowndrLVS8

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Securitisation Summit

12-Hour Certificate Course on Leasing

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Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting

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– Team Corplaw | corplaw@vinodkothari.com

Continuing with the spree of regulatory changes brought in 2025, RBI has issued Amendment Directions on Lending to Related Parties by Regulated Entities. Separate notifications have been issued for each regulated entity, based on the draft Directions for lending and contracting with related parties issued on 3rd October, 2025. We discuss the changes brought in for commercial banks by way of the RBI (Commercial Banks – Credit Risk Management) – Amendment Directions, 2026 and RBI (Commercial Banks – Financial Statements: Presentation and Disclosures) – Amendment Directions, 2026. 

Highlights:

  • New rules apply from 1st April, 2026. Existing facilities, if in breach of the new provisions, can continue to run down; however, shall not be renewed or extended
  • Related Party: the meaning of the word is quite different from the commonly understood expression under the SEBI Regulations or Companies Act. Hence, banks will maintain a parallel list of related parties under the CRM Directions
    • Primarily concerned with directors, KMPs and their interested persons and entities
    • Related party = Related person (RP) + Reciprocally Related person (RRP) + Specific entities in which RP or RRP are interested
  • Contracts or arrangements enumerated in sec. 188 (1) of Companies Act also covered
  • Lending to or contracts with Specified Employees
    • means employees 2 levels below the Board or as designated by the Board 
    • left to the Policy to be framed by the Bank
    • To be reported to the Board annually 
  • Board approved Policy on CRM
    • To include aspects related to lending to RPs 
    • Specify aggregate limits and sub-limits for lending to RPs including single RPs
    • To incorporate whistleblower mechanism to raise concerns over questionable loans to RPs and quid pro quo arrangements 
    • Any deviation from policy to be reported to Audit Committee 
  • Restrictions on lending by banks 
    • to its promoters and their relatives; shareholders with shareholding of 10 per cent or more in the paid-up equity capital of the bank; as also the entities in which they (promoters, their relatives and shareholders as stated above) have significant influence or control (as defined under Accounting Standards Ind AS 28 and Ind AS 110).
    • In addition to restrictions on lending to directors and interested entities under section 20 of BR Act
  • “Materiality threshold” for lending to related parties
    • based on the capital of the bank – from Rs 5 crores to Rs 25 crores 
    • lending over the materiality threshold requires approval of board/ a committee on lending to RPs
    • Does not include (i) credit facilities fully secured by cash or liquid securities, and (ii) interbank loans
  • Committee on lending to RPs 
    • Bank may identify any existing committee, other than the Audit Committee
    • Does it mean the Audit Committee cannot sanction approval for loans to RP? 
  • Recusal of interested parties from deliberations and discussions on loan proposals, contracts or arrangements involving them or their related parties 
  • Internal auditors to review, on a quarterly or shorter intervals, adherence to the guidelines and procedures in relation to related party lendings.

Immediate Actionables 

  • Designate a board committee for sanction of loans to related parties beyond materiality thresholds 
  • Identify and maintain a list of related parties as per the definition under the Amendment Directions 
  • Modify and adopt a revised Credit Risk Management Policy in line with the requirements of the Amendment Directions 
  • Adopt limits and sub-limits for (a) aggregate transactions with RPs, (b) transactions with each RP and (c) transactions with a group of RPs 
  • Sensitise relevant business teams on the materiality thresholds and the internal Credit Policy of the Bank 
  • Engage the services of internal auditors for periodic review (quarterly or shorter intervals)

RPT Framework: Amendment Directions vis-a-vis Companies Act and LODR

Point of comparison CRM Amendment Directions Listing RegulationsCompanies Act
Scope of coverageLoans, non-funded facilities, investment in debt securitiesAny transfer of resources, obligations or servicesContracts as enumerated u/s 188 (1)
Meaning of related partyDirectors, KMPs, promoter, their relatives, entities in which either of them have specified interest (partnership, shareholding, control, etc).Does not include Company’s own holding company, subsidiaries or associatesWide definition, including sec 2 (76) of CA, accounting standards, promoter, promoter group entities, shareholders with 10% or more shareholdingAs defined in sec. 2 (76), primarily including directors, KMPs, their relatives, private cos where such persons are a director or member, public companies with directors’ 2%  shareholdings.Includes entity’s own subsidiaries, associates, JVs, holding company
Concept of “reciprocally related party”In line with the statutory restrictions, includes directors/relatives on the boards of other banks, AIFIs, trustees of mutual funds set up by other banksDoes not exist; however, a purpose-and-effect test exists whereby surrogate transactions may be covered.Does not exist
Primary approving bodyCommittee on Lending to Related Parties, or the BoardAudit CommitteeAudit Committee; or the Board
Shareholders’ approvalNot requiredRequired if crossing materiality thresholdRequired if not on in ordinary course of business+ arm’s length, and crossing materiality threshold
Materiality thresholdBeing linked with a single loan exposure, ranges from Rs 5 crores to Rs 25 crores depending on Bank’s capitalBeing aggregated for transactions during a FY, ranges from 10% of the entity’s consolidated turnover to Rs 5000 crores based on consolidated turnover of the entity Usually based on 10% of turnover or net worth (depending on transaction type)

See our related resources here:

https://vinodkothari.com/2026/01/lending-to-your-own-rbi-amendment-directions-on-loans-to-related-parties/

https://vinodkothari.com/2026/01/shastrarth-26-loans-to-related-parties-by-banks-and-nbfcs/

Does Co-lending Make Default a Communicable Disease?

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How to ensure uniform asset classification under co-lending

Simrat Singh | finserv@vinodkothari.com

Asset classification under RBI regulations has always been anchored to the borrower, not to individual loan facilities. Once a borrower shows repayment stress in any exposure, it is no longer reasonable to treat the borrower’s other obligations as unaffected; prudence requires that all other facilities to that borrower reflect the same level of stress. Even the insolvency law reinforces this borrower-level approach to default by allowing CIRP to be triggered irrespective of whether the default is owed to the applicant creditor or not (see Explanation to section 7 of the IBC). 

This borrower-level approach is not unique to India. Globally, the Basel framework also defines default at the obligor level – the core idea being that credit stress is a condition of the borrower, not of a single loan. In other words, when a borrower sneezes financial distress, all his loans catch a classification cold.

Position under the earlier co-lending framework

Under the earlier 2020 framework for priority sector co-lending between banks and NBFCs, each RE applied its own asset classification norms to its respective share of the co-lent loan (see para 13 of 2020 framework). This allowed situations where the same borrower and same loan could be classified differently in the books of the two co-lenders. While operationally convenient, this approach sat uneasily with the borrower-level logic of RBI’s IRACP norms and diluted the consistency of credit risk recognition in a shared exposure.

Position under the Co-Lending Arrangements Directions, 2025

The 2025 Directions [now subsumed in Para B of the Reserve Bank of India (Non-Banking Financial Companies – Transfer and Distribution of Credit Risk) Directions, 2025] resolve this inconsistency by requiring uniform asset classification across co-lenders at the borrower level (see para 124 reproduced below for reference).

124. NBFCs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA, implying that if either of the REs classifies its exposure to a borrower under CLA as SMA / NPA on account of default in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under CLA. NBFCs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day.

Therefore, where one co-lender classifies its share of a co-lent exposure as SMA or NPA, the other co-lender must apply the same borrower classification to its share of the same exposure. It was an extension of RBI’s long-standing borrower-wise classification principle into a multi-lender structure.

Why “under the CLA” cannot be read in isolation

However, the wording of paragraph 124 has, in practice, been interpreted by some lenders in a much narrower manner. The phrase “under the CLA” has been read to mean that the classification of the other co-lender’s share would change only if the borrower defaults on the co-lent exposure itself. On this interpretation, where a borrower defaults on a separate, non-co-lent loan, lenders may in their books follow borrower level classification but they need not share such information with the co-lending partner since there is no default in the co-lent loan.

This approach, however, runs contrary to the regulatory intent and represents a classic case where the literal reading of a provision is placed in conflict with its underlying purpose. Market practice reflects this divergence. Traditional lenders have generally adopted a conservative approach, applying borrower-level classification across exposures irrespective of whether the default arises under the CLA. Certain other lenders, however, have taken a more aggressive position, limiting classification alignment strictly for defaults under the co-lent exposure. The conservative approach is more consistent with RBI’s prudential framework and intent, which has always treated credit stress as a condition of the borrower rather than of a particular loan structure.

Implications for other exposures to the same borrower

Once borrower-level classification is accepted as the governing principle, the consequence is straightforward: any other exposure that a co-lender has to the same borrower must also reflect the borrower’s SMA or NPA status, even if that exposure is not part of the co-lending arrangement. Let us understand this by way of examples.

Scenario 1: Multiple Loans, No Co-Lending Exposure 

A borrower has three separate loans:

  1. L1: 100% funded by A
  2. L2: 100% funded by B
  3. L3: 100% funded by C

Although A, B and B may be co-lending partners with each other in general, none of the above loans are under a co-lending arrangement (CLA).

Treatment: Since there is no co-lent exposure to the borrower, paragraph 124 of the Directions does not apply. Each lender classifies and reports its own loan independently, as per its applicable asset classification norms. There is no obligation to share asset-classification information relating to these loans among the lenders.

Scenario 2: One Co-Lent Loan and Other Standalone Loans

A borrower has three loans:

  1. L1: Co-lent by B (80%) and A (20%)
  2. L2: 100% funded by A (not co-lent)
  3. L3: 100% funded by C (not co-lent)

Case A: Default under the Co-Lent Loan

If B classifies its 80% share of L1 as NPA:

  • A’s 20% share of L1 must also be classified as NPA, even if it was standard in A’s books. While given that the asset classification norms for different REs are aligned and the invocation of any default loss guarantee also does not impact the asset classification; there does not seem to be any reason for a difference in the asset classification of the co-lenders in this case.  
  • Since asset classification is borrower-level, A must also classify L2 as NPA, even though L2 is not under a co-lending arrangement.
  • L3 remains unaffected, as C is not a co-lender to the same borrower and there is no requirement for B or A to share borrower-level information with C.

Case B: Default under a Non-Co-Lent Loan by any one of the Co-Lenders

If A classifies L2 as NPA:

  • Since asset classification is borrower-level, A must also classify L1 as NPA
  • B’s 80% share of L1 must also be classified as NPA
  • L3 remains unaffected, as C is not a co-lender to the same borrower and there is no requirement for B or A to share borrower-level information with C.

Case B: Default under a Non-Co-Lent Loan of a Third Lender

Assume L3 is classified as NPA by C, while L1 and L2 remain standard.

  • There is no impact on the books of B or A.
  • C is not required to share information on L3 with B or C, as there is no co-lending exposure between them for this borrower.

Note that borrower-level asset classification and information sharing activates only where there is a co-lending exposure to the borrower. Once such an exposure exists, any default in any loan of a co-lender triggers borrower-level classification across all exposures of that lender, including standalone loans. However, lenders with no co-lending exposure to the borrower remain outside this information-sharing loop. May refer the below chart for more clarity:

Fig 1: Decision chart for asset classification of loans under co-lending

Information Sharing and Operational Impact

To make borrower-level classification work in practice, the 2025 Directions require co-lenders to put in place information-sharing arrangements. Any SMA or NPA trigger must be shared with the other co-lender promptly and, in any case, by the next working day. It requires aligned IT systems so that both lenders update their books on the borrower at the same time, or as close to real time as possible.

Conclusion

The 2025 Directions reinforce a long-standing regulatory principle: credit stress belongs to the borrower, not to a specific loan or lender. Uniform borrower-level classification and timely information sharing are essential to preserve consistency in risk recognition across co-lenders. While this increases operational complexity, it aligns co-lending practices with RBI’s prudential intent.

See our other resources on co-lending.

Shastrartha 25 – Regulations for Banking Group Entities

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Register your interest here: https://forms.gle/cfHXEVc39B4g14ek6

A 5th December 2025 RBI amendment has introduced significant changes to the manner in which business activities may be allocated among banks and entities within banking groups, including NBFCs, HFCs, securities broking entities, AMCs, and others. These changes impact all banks with non-banking subsidiaries or associates, as well as all NBFCs, HFCs, and related entities forming part of banking groups.

Some of the requirements come into effect as early as 31st March 2026, creating an urgent need for impacted entities to reassess, restructure, or reposition their business models and inter-group arrangements.

We intend to examine these developments in depth. Given the nature and implications of the amendment, the session will include active interaction with seasoned banking and finance professionals.

You are invited to express your interest in joining this interactive discussion, scheduled for December 15th, 2025 | 6:00 p.m. onwards | YouTube & Zoom Live.

Other Resources:

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