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Understand RBI’s regulatory restrictions on loans and advances by NBFCs, effective from October 01, 2022. Learn about limits for directors, senior officers, and real estate sector exposure. Stay compliant.

Loans and Advances – Regulatory Restrictions – NBFCs

This is in reference to the RBI circular issued on regulatory restrictions w.r.t loans and advances. These guidelines shall be effective from October 01, 2022.

Guidelines applicable to NBFC – Middle Layer (ML) and NBFC – Upper Layer (UL) – Regulatory Restrictions on Loans and Advances.

A. Loans and advances to “Directors”

I Unless sanctioned by the Board of Directors/ Committee of Directors, NBFCs shall not grant loans and advances aggregating (total exposure considering all products) Rupees five crores and above to

1. Directors (including the Chairman/ Managing Director)

2. “Relatives” of directors

3. Any firm in which any of the directors or their relatives is interested as a partner, manager, employee or guarantor.

4. Any company in which any of their directors, or their relatives is interested as a major shareholder, director, manager, employee or guarantor. Provided that a director or his/her relatives shall be deemed to be interested in a company, being the subsidiary or holding company, if she is a “major shareholder” or is in “control” of the respective holding or subsidiary company.

II The proposals for credit facilities of an amount less than Rupees five crore to these borrowers may be sanctioned by the appropriate authority in the NBFC under powers vested in such authority, but the matter should be reported to the Board.

B. Loans and advances to “Senior Officers” of the NBFC

1. Loans and advances sanctioned to “senior officers” of the NBFC shall be reported to the Board.

2. The senior officer or any Committee comprising the senior officer as member, shall not sanction any credit facility to a relative of that senior officer. Such a facility shall be sanctioned by the next higher sanctioning authority under the delegation of powers.

C. Loans and advances to “Real Estate Sector”

While appraising loan proposals involving real estate, NBFCs shall ensure that the borrowers have obtained prior permission from government/ local government/ other statutory authorities for the project, wherever required.

Important points need to be taken care of:

  • A declaration shall be obtained along with the application form from the borrower giving details of the relationship of the borrower to the directors/ senior officers.
  • The company shall disclose in their Annual Financial Statement, aggregate amount of such sanctioned loans and advances as per template provided in the Appendix to the attached circular.
  • The guidelines shall be placed before the NBFC’s Board of Directors.

Note: Meaning of Terms

RBI has stated that the meaning of the below terms shall be as provided under the Companies Act 2013.

Control [Clause (27) of Section 2 of the Companies Act, 2013]

“Control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Relative [Clause (77) of Section 2 of the Companies Act, 2013]

“Relative”, with reference to any person, means any one who is related to another, if-

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the other in such manner as may be prescribed (provided below);

a. Father: Provided that the term “Father” includes step-father.

b. Mother: Provided that the term “Mother” includes the step-mother.

c. Son: Provided that the term “Son” includes the step-son.

d. Son’s wife.

e. Daughter.

f. Daughter’s husband.

g. Brother: Provided that the term “Brother” includes the step-brother;

h. Sister: Provided that the term “Sister” includes the step-sister.

3. Senior Officer/Senior Management [Section 178 of the Companies Act, 2013]

‘‘Senior management’’ means personnel of the company who are members of its core management team excluding Board of Directors and comprising all members of management one level below the executive directors, including the functional heads.

4. Major Shareholding (As specified in the RBI Circular)

The term “major shareholder” shall mean a person holding 10 % or more of the paid-up share capital or five crore rupees in paid-up shares, whichever is lower.


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April 2024