RBI Directions 2025 – PSL | Co-Lending | Credit Risk Updates

RBI Directions 2025 introduce a comprehensive regulatory overhaul covering priority sector lending, co-lending, credit risk management, Basel III norms, and borrower protection measures. These updates aim to strengthen prudential oversight, enhance transparency, and ensure a balanced flow of credit across sectors while aligning India’s banking framework with evolving economic and risk management requirements.

Table of Contents

1. Amendment to Prudential Regulations on Basel III Capital Framework and Investment Portfolio Norms for All India Financial Institutions (AIFIs)
2. Master Directions – Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025
3. Reserve Bank of India (Co-Lending Arrangements) Directions, 2025
4. Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025
5. Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025
6. Reserve Bank of India (Lending Against Gold and Silver Collateral) – (1st Amendment) Directions, 2025
7. Reserve Bank of India (Trade Relief Measures) Directions, 2025
8. Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025

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1. Amendment to Prudential Regulations on Basel III Capital Framework and Investment Portfolio Norms for All India Financial Institutions (AIFIs)

1.1 Introduction

The Reserve Bank of India (RBI) has amended specific provisions under the Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, and Operation of Investment Portfolio Norms for All India Financial Institutions (AIFIs). The change aims to provide greater flexibility in investments aligned with the developmental mandates of AIFIs.

1.2 Summary

The amendment modifies paragraph 34.2 of the RBI Directions issued on September 21, 2023, governing prudential norms for AIFIs such as EXIM Bank, NABARD, NaBFID, NHB, and SIDBI.

As per the revised clause, investments made by AIFIs in long-term bonds and debentures (having a minimum residual maturity of three years at the time of investment) issued by non-financial entities will not be counted towards the 25% ceiling applicable to the Held to Maturity (HTM) category under the investment portfolio.

This relaxation enables AIFIs to extend greater long-term funding to infrastructure and industrial sectors without breaching prudential investment caps. It also clarifies that such investments, made under the statutory mandates of AIFIs, are consistent with sound risk management practices and capital adequacy requirements.

The amendment comes into effect from April 1, 2025, and has been issued under Section 45L of the Reserve Bank of India Act, 1934. All AIFIs are required to make necessary adjustments in their investment and accounting systems to comply with the revised provisions.

1.3 Comments/Rationale

The amendment encourages long-term financing by AIFIs, supporting credit flow to productive sectors while maintaining prudential control over portfolio risks.

Circular No. – RBI/2024-25/116|DOR.MRG.REC.60/00-00-017/2024-25 | Dated February 17, 2025

Reference Link – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12783&Mode=0

2. Master Directions – Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025

2.1 Introduction

The Reserve Bank of India (RBI) issued updated Master Directions on Priority Sector Lending (PSL) on March 24, 2025, superseding the earlier 2020 directions. These Directions, effective April 1, 2025, aim to ensure a structured and adequate flow of credit to key sectors contributing to socio-economic development, particularly those underserved despite being creditworthy.

2.2 Key Highlights

• Applicability – To all Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks (LABs), and Urban Co-operative Banks (UCBs), excluding salary earners’ banks.
• Purpose – To delineate a framework that promotes credit flow to essential sectors for balanced and inclusive growth.

2.3 Main Provisions

• Categories under PSL – Agriculture, MSMEs, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, and Others.
• Revised PSL Targets:

1. 1. Domestic banks and large foreign banks – 40% of ANBC.
   2. RRBs and SFBs – 75% of ANBC.
   3. UCBs – 60% of ANBC.
   4. Agriculture – 18% of ANBC, of which 14% for Non-Corporate Farmers and 10% for Small and Marginal Farmers (SMFs).
   5. Weaker sections – 12% of ANBC.

• Adjusted Net Bank Credit (ANBC) – Computed as per revised formula incorporating exemptions, on-lending, and eligible investments.
• Regional Weighting Framework – Higher weight (125%) assigned to incremental PSL in districts with lower per capita PSL (below Rs. 9,000) and lower weight (90%) for high-credit districts (above Rs. 42,000).
• Sectoral Definitions and Eligibility:

1. 1. Agriculture: Includes farm credit, allied activities, infrastructure, and ancillary services.
   2. MSME: Loans to micro, small, and medium enterprises, start-ups (up to Rs. 50 crore), and factoring transactions.
   3. Housing: Loans up to Rs. 50 lakh for individuals (depending on population tier) and up to Rs.  12 crore for healthcare facilities.
   4. Renewable Energy: Loans up to Rs. 35 crore for projects; Rs. 10 lakh for households.

• On-Lending and Co-lending – Permitted to NBFCs, MFIs, and HFCs under specified limits (up to Rs. 10–20 lakh per borrower) with overall caps (5–10% of PSL portfolio).
• Monitoring and Reporting – Compliance to be monitored quarterly; shortfall in PSL targets to attract contributions to RIDF/NABARD and related funds with penal interest rates.

2.4 Comments/Rationale

The 2025 revision consolidates all PSL norms into one directive, enhancing clarity and operational efficiency for banks. The updated framework reflects RBI’s focus on inclusive credit expansion, regional balance, and support for emerging sectors such as renewable energy, agri-infrastructure, and start-ups.

Reference – RBI/FIDD/2024-25/128 (Master Directions FIDD.CO.PSD.BC.13/04.09.001/2024-25, March 24, 2025).

Link – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12799&Mode=0

3. Reserve Bank of India (Co-Lending Arrangements) Directions, 2025

3.1 Introduction

RBI issued the Co-Lending Directions, 2025 to create a uniform framework for joint lending by banks and NBFCs. The norms streamline governance, customer handling and risk sharing, replacing earlier fragmented guidelines. These Directions apply to all commercial banks (except SFBs, RRBs, LABs), AIFIs and NBFCs/HFCs from January 1, 2026.

3.2 Summary

The Directions require a formal co-lending agreement between partner REs, defining roles, underwriting standards, servicing responsibilities and grievance redressal. Each RE must retain a minimum 10% share of every loan. Co-lending does not apply to consortium or multiple banking arrangements, and if the model includes digital onboarding, the Digital Lending Directions also become applicable.

Loan agreements must clearly mention the servicing entity and borrower interface. Any change must be notified to the borrower. The Key Facts Statement (KFS) must reflect loan share, interest, charges, responsibilities and escalation paths. Partner REs classify the borrower’s exposure uniformly—if one RE reports SMA/NPA, the other must mirror it.

Co-lent loans must be disbursed through an escrow mechanism, and the partner RE must take its loan share within 15 days, failing which the loan stays solely with the originating RE. Disclosures on fees and APR must be transparent, and fees cannot include credit enhancements or guarantees except permissible DLG.

Priority Sector treatment can be applied independently by each RE for its own share. Transfer of co-lent loans must follow the MD–Transfer of Loan Exposures, 2021. Co-lent portfolios must be part of internal and statutory audits. REs must maintain business continuity plans to avoid disruption even if the co-lending arrangement ends.

DLG may be provided (by the originating RE) up to 5% of outstanding loans in line with Digital Lending rules. REs must publish on their websites a list of all active co-lending partners, and periodic financial disclosures must show details of the aggregate co-lent portfolio, including performance and DLG arrangements.

3.3 Comments/Rationale

These Directions bring consistency and strengthen borrower protection in co-lending models, where rapid growth had created variations in practices. The framework ensures transparency, standardised governance, clear customer interface, and balanced risk-sharing between banks and NBFCs.

Reference – RBI/2025-26/139DOR.STR.REC.44/13.07.010/2025-26. Dated: August 6, 2025

Link – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12888&Mode=0

4. Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025

4.1 Introduction

RBI issued the Non-Fund Based Credit Facilities (NFBF) Directions, 2025 to consolidate all guidelines related to bank guarantees, standby letters of credit (SBLCs), and other non-fund based exposures. The framework strengthens due-diligence, standardises risk management practices and aligns NFBF norms with the updated capital, credit and exposure norms. These Directions come into force from January 1, 2026.

4.2 Summary

The Directions define all NFBF instruments including guarantees, SBLCs, performance guarantees, financial guarantees, co-acceptances, letters of comfort, bid bonds, shipping guarantees and similar contingent facilities. Banks must ensure that the creditworthiness of the applicant is established before issuing any facility. NFBFs can be issued only after proper appraisal, sanction under the bank’s credit policy, and execution of counter-indemnity or security documents.

Banks must ensure that NFBF issuance is linked to genuine underlying transactions. Guarantees or SBLCs cannot be issued for activities prohibited under FEMA, FCRA or any other law. Banks must avoid issuing “comfort letters” that create implicit financial obligations unless approved under board-approved policies. NFBFs for related parties must follow arm’s-length principles and stricter due-diligence.

Pricing must be risk-based, and banks should carefully assess the financial position and repayment ability of the applicant, taking into account past performance. For infrastructure, large exposures or project-related obligations, banks must ensure that the project is viable and implementation risks have been evaluated. Issuance of financial guarantees on behalf of NBFCs must follow the restrictions already specified under the bank–NBFC credit flow guidelines.

Banks must comply with exposure ceilings under the Large Exposure Framework (LEF). For capital adequacy purposes, NFBFs must be converted using appropriate Credit Conversion Factors (CCF) as per the Basel III capital framework. Banks must compute exposure on the higher of the amount guaranteed or the amount outstanding under related credit facilities.

Guarantees under Government-sponsored schemes, trade-related obligations, performance-based contracts and MSME-related projects must follow the specific programme rules but remain subject to the general due-diligence and risk-management criteria under these Directions. All NFBF portfolios must undergo periodic internal audit and supervisory review. Banks must disclose contingent liabilities transparently in their financial statements, including aging and risk characteristics.

4.3 Comments/Rationale

These Directions unify all earlier fragmented rules on guarantees and SBLCs, ensuring stronger credit discipline and better risk capture for contingent exposures. By aligning issuance, monitoring and capital treatment with Basel III norms, the framework improves prudential oversight, promotes transparency and mitigates risks arising from indiscriminate guarantees.

Reference Link: RBI/2025-26/140. DOR.CRE.REC.45/21.04.048/2025-26. Dated: August 6, 2025

Link: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12889&Mode=0

5. Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025

5.1 Introduction

RBI has issued amendments to the Interest Rate on Advances Directions, 2016, and aligned changes to the Floating Interest Rate Reset Circular (2023) and associated FAQs. The objective is to improve borrower transparency, allow flexibility for interest rate choices, and help banks retain customers through fair and non-discriminatory pricing adjustments.

5.2 Summary

A new provision has been added to the Interest Rate on Advances Directions allowing banks to reduce certain components of the spread for any loan category before the mandatory three-year review cycle, provided such reduction is:

• justified,
• non-discriminatory, and
• in line with the bank’s Board-approved policy.

This flexibility is intended to support customer retention while maintaining transparent interest rate practices.

Amendments have also been introduced in the Circular on Reset of Floating Interest Rate on EMI-based Personal Loans (August 18, 2023). At the time of rate reset, regulated entities (REs) may offer borrowers an option to switch to a fixed interest rate, based on the institution’s Board-approved policy.

The policy may define:

• eligibility to switch, and
• number of allowable switches during the loan tenor.

This enhances borrower choice and allows customers to shift from variable-rate volatility to fixed-rate certainty.

5.3 Comments/Rationale

The amendments increase borrower flexibility, improve clarity in personal loan reset practices, and enable banks to adjust spreads fairly to retain customers. They reduce rigidity in interest rate policies while preserving transparency.

Reference Link: RBI/2025-26/83–DOR.CRE.REC.51/13.03.00/2025-26

Link: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12902&Mode=0

6. Reserve Bank of India (Lending Against Gold and Silver Collateral) – (1st Amendment) Directions, 2025

6.1 Introduction

RBI issued amendments to the Lending Against Gold and Silver Collateral Directions, 2025 to clarify certain restrictions, especially relating to loans for purchase of gold and loans against primary gold/silver. The update also aligns earlier circulars into the Master Direction framework. The amendments take effect from October 1, 2025 for lenders who have already adopted the original Directions.

6.2 Summary

Banks and lending institutions cannot grant any loan or advance:

• for the purchase of gold in any form (primary gold, jewellery, ornaments, coins),
• for the purchase of financial assets backed by gold or silver (e.g., Gold ETFs, Gold Mutual Funds), and
• against primary gold, primary silver, or financial assets backed by primary gold or silver.

However, the amendment introduces an important exception: Scheduled Commercial Banks and Tiers 3 & 4 Urban Co-operative Banks may extend need-based working capital finance to borrowers who use gold or silver as a raw material or input in manufacturing or industrial processing.

Under this exception:

• the gold or silver used as raw material may also be accepted as collateral;
• banks must ensure borrowers do not use such finance for acquiring or holding gold/silver for investment or speculative activities.

This provision aims to support genuine industrial users—such as jewellery manufacturers—while preventing speculative or arbitrage-driven lending against gold/silver.

6.3 Comments/Rationale

The amendment improves clarity on what types of gold/silver-related lending are prohibited versus permitted. It preserves the policy stance against speculative financing while enabling legitimate working capital support for industries that use gold or silver as productive inputs.

Reference Link: RBI/2025-26/84–DOR.CRE.REC.52/21.01.023/2025-26

Link: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12903&Mode=0

7. Reserve Bank of India (Trade Relief Measures) Directions, 2025

7.1 Introduction

RBI has issued a special relief framework to support exporters affected by global trade disruptions. The Directions allow regulated entities to extend temporary moratoriums, deferments, extended export credit periods, and relaxed working capital norms, while ensuring asset classification continuity. The measures come into force immediately.

7.2 Summary

The Directions apply to Commercial Banks, Co-operative Banks, NBFCs (including HFCs), All-India Financial Institutions, and Credit Information Companies (for reporting-related provisions). Each regulated entity (RE) must frame a Board-approved policy stating eligibility and objective criteria for granting relief.

7.3 Eligibility Criteria

Borrowers qualify only if:

• They are engaged in export of sectors listed (e.g., chemicals, apparel, machinery, plastics, footwear, pearls & precious stones, electronics, metals, vehicles, furniture).
• They had outstanding export credit as on August 31, 2025.
• Their accounts were Standard on the same date. REs other than the sanctioning bank may rely on certification from lending REs to confirm eligibility.

7.4 Relief Measures

Moratorium/Deferment (Sept. 1 – Dec. 31, 2025)

• REs may grant moratorium on term loan instalments (principal/interest).
• For CC/OD facilities, interest recovery may be deferred.
• Interest continues to accrue but only simple interest applies; no compounding.
• Accrued interest may be converted into a Funded Interest Term Loan (FITL), repayable between April–September 2026.
• REs may reassess drawing power by reducing margins or revising limits during the effective period.

Extended Export Credit Tenor

• REs may allow up to 450 days for pre- and post-shipment export credit disbursed till March 31, 2026.
• For packing credit sanctioned on/before August 31, 2025 where goods could not be dispatched, liquidation may be permitted from:

1. 1. domestic sale proceeds, or
   2. substitution of export contract.

7.5 Asset Classification & Provisioning

Asset Classification

• Moratorium/deferment period is excluded for NPA counting.
• Such relief will not be treated as restructuring, avoiding automatic downgrade.
• After the relief period, normal IRACP norms apply.
• REs must report to CICs accordingly; CICs must ensure borrower credit history is not adversely impacted.

Provisioning

• For eligible standard accounts that were in default as on August 31, 2025, REs must create 5% general provision by Dec. 31, 2025.
• Provision may be adjusted against future slippages; any remaining balance must be adjusted/written back by June 30, 2026.

7.6 Disclosure & Reporting

• REs must maintain detailed MIS of reliefs provided.
• Fortnightly reporting (15th & month-end) must be submitted via RBI’s DAKSH platform.

7.7 Comments/Rationale

The framework cushions exporters from global trade shocks by offering temporary liquidity relief without penal asset classification. It ensures business continuity for viable export units while maintaining prudential discipline.

Reference: RBI/2025-26/96 – DOR.STR.REC.60/21.04.048/2025-26

Link: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12921&Mode=0

8. Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025

8.1 Introduction

RBI has issued updated and consolidated Credit Risk Management Directions for commercial banks, covering appraisal standards, governance controls, statutory restrictions, exposure rules, UFCE assessment, country risk, valuation processes, and current account norms. These Directions replace earlier fragmented guidelines with a uniform framework.

8.2 Summary

Banks must adopt a Board-approved Credit Risk Management Policy, covering appraisal standards, sectoral limits, current account rules, valuation norms, and monitoring frameworks.