With the aim of strengthening guidelines for non-fund based (NFB) credit facilities, the Reserve Bank of India (RBI) has issued directions on 6 August 2025, effective from 1 April 2026 or earlier, as may be decided by a regulated entity (RE) in accordance with its internal policy. The directions set out conditions governing guarantees, co-acceptances and partial credit enhancements (PCE).

The directions apply to REs. These are commercial banks, including regional rural banks, urban and state co-operative banks, all-India financial institutions (AIFI) and non-banking financial companies (NBFC), including housing finance companies (HFC) in the middle and above layers. However, NBFCs and HFCs are only permitted to issue PCEs under the new regime.

Other than in a few exceptional situations listed in the directions, NFB facilities will be available only to customers already granted funded credit facilities by REs. Guarantees issued by REs must be irrevocable, unconditional and incontrovertible. Where secured guarantees are given by co-operative banks and commercial banks, the cap is 5% of total assets and 1.25% of total assets in the case of unsecured guarantees.

Guidelines have been issued to regulate the use of electronic guarantees, minimising manual intervention and shifting towards employing technology. This will improve transparency and traceability, ensuring greater compliance as well as reducing the possibility of error. To manage operational risks effectively, REs will have to make provision for electronic guarantees in their credit policies, supported by detailed standard operating procedures. Aligning with the spirit of Digital India, the National Highways Authority of India now accepts the electronic bank guarantee (BG) services of National e-Governance Services and has digitalised all existing bank guarantees.

REs are permitted to co-accept only genuine trade bills, ensuring that goods covered by such bills are actually received and appropriately reflected in borrowers’ stock records. In addition, REs are prohibited from co-accepting bills that are drawn by another RE or in cases where buyers or sellers have already received funding from any RE for the underlying trade transaction.

PCEs are limited credit support that improve the credit rating of bonds issued by corporates for funding infrastructure projects or bonds issued by NBFCs with assets of INR10 billion (USD113.5 million) or more and registered with the RBI. The directions relating to PCEs have been extended to scheduled commercial banks (excluding regional rural banks), AIFIs and NBFCs, including HFCs in the middle and above layers. PCEs, being subordinated facilities provided in the form of irrevocable contingent lines of credit (but not in the form of guarantees) to support shortfalls in cash flows for servicing such bonds. PCEs may also be revolving in nature. Following these directions, the National Bank for Financing Infrastructure and Development has launched a range of PCE products in September 2025.

A number of conditions have been placed on PCEs by the directions. The PCE exposure limit by a single RE has been enhanced to 50% of the bond issue size, replacing the previous cap of 20%. However, the aggregate PCE exposure of REs must not exceed 20% of their tier 1 capital. REs may offer PCEs only in respect of bonds whose pre-enhanced rating is not lower than BBB minus, as calculated by external credit assessment institutions.

The RBI has imposed additional conditions for extending PCEs to bonds of NBFCs/HFCs. These include the tenure of the bond being a minimum of three years and proceeds from PCE-backed bonds only being used to refinance existing debt. The exposure of REs to such bonds by way of PCEs is capped at 1% of the capital funds of such REs within the existing single/group borrower exposure limits.

All REs are required to disclose NBF facilities in their balance sheets with separate disclosures of secured and unsecured guarantee obligations, whether in India or abroad, acceptance, endorsements and other contingent liabilities. These RBI directions are a significant step towards establishing a sound regulatory framework governing NFB facilities. They focus on widening access to funding sources for infrastructure projects and imposing uniformity on all NFB facilities across the RE spectrum.

Anju Gandhi is a senior partner and the head of banking and finance practice, Hetal Sheth is an associate partner and Aneeka Kairanna is a trainee associate at SNG & Partners