The Reserve Bank of India (RBI), through circular DBOD.Dir.BC.62/13.07.09/2002-03 dated January 24, 2003, had earlier prohibited banks from extending non-fund based facilities to non-constituent borrowers. This restriction was aimed at preventing frauds, fund diversion, and misuse of one-off transaction-based facilities without proper credit assessment.

However, over time, this blanket bar created genuine challenges for borrowers who required Letters of Credit (LCs), Bank Guarantees, or Partial Credit Enhancement (PCE) but did not maintain any fund-based working capital or term loan limits with banks.

With the strengthening of credit information systems and robust reporting to Credit Information Companies (CICs), RBI has now permitted Scheduled Commercial Banks (excluding RRBs) to extend non-fund based facilities to such borrowers, subject to strict regulatory safeguards.

Key Conditions for Granting Non-Fund Based Facilities to Non-Constituent Borrowers

1. Board-Approved Loan Policy

Banks must frame a comprehensive Board-approved policy specifically governing the extension of non-fund based facilities to borrowers who do not avail any fund-based credit from any bank in India.

2. Verification of Absence of Fund-Based Limits

Before sanctioning facilities, banks must:

* Ensure the borrower has not availed any fund-based facility from any bank in India.

* Obtain a customer declaration regarding non-fund based facilities already availed from other banks.

 

3. Full Compliance with KYC/AML/CFT Norms

Banks must strictly comply with:

* KYC guidelines

* Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) norms

* Provisions of the Prevention of Money Laundering Act, 2002

4. Rigorous Credit Appraisal

Credit assessment must be:

* At par with the appraisal process for equivalent fund-based limits

* Supported by thorough due diligence

* Reported to RBI-authorised Credit Information Companies, ensuring system-wide visibility of the exposure

5. Adherence to Exposure and Prudential Norms

Banks are required to continue following all applicable:

* Exposure limits, and

* Prudential norms governing off-balance sheet items, as prescribed by RBI.

Clarification on Negotiation of LCs for Non-Constituents

RBI has reiterated that this relaxation does not dilute the prohibition on negotiating unrestricted Letters of Credit of non-constituents, as stated in paragraph 2.3.9 of the Master Circular Loans and Advances – Statutory and Other Restrictions” (DBR.No.Dir.BC.10/13.03.00/2015-16 dated July 1, 2015 “).

* If an LC is restricted to a particular bank, and the beneficiary is not a constituent of that bank, the named negotiating bank may negotiate the bills.

* However, the LC proceeds must be remitted only to the beneficiary’s regular banker, ensuring transaction traceability and preventing misuse.

Here is a clean, blog-friendly **Summary Box** you can insert into your article:

🔎 Summary at a Glance: RBI Relaxation on Non-Fund Based Facilities to Non-Constituents

* What Changed?

  RBI now permits Scheduled Commercial Banks (excluding RRBs) to extend *non-fund based facilities*—such as LCs, Bank Guarantees, and PCE—to borrowers who do not avail any fund-based credit.

* Why the Change?

  Stronger credit information systems and improved reporting to CICs have reduced risks of fraud and misuse.

* Key Requirements for Banks:

  * Board-approved policy specifically for such facilities

  * Verification that borrower has no fund-based limits with any bank

  * Strict compliance with KYC/AML/CFT and PMLA norms

  * Full-scale credit appraisal and due diligence

  * Mandatory reporting of these facilities to Credit Information Companies

  * Adherence to RBI exposure and prudential norms

*Important Clarification:

  The relaxation does not permit negotiation of unrestricted LCs of non-constituents. Restricted LCs may be negotiated, but proceeds must be routed to the beneficiary’s regular banker.

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