October 2025 – March 2026 – Veritas Legal

Regulatory Updates

Investment in Corporate Debt Securities by Persons Resident Outside India through Special Rupee Vostro Account

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On 3 October 2025, RBI issued a circular permitting persons resident outside India maintaining special rupee vostro accounts (“SRVA”) for international trade settlement in Indian Rupee to invest in broader range of Indian corporate debt securities. The new circular expands the list of “eligible instruments” in the Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025 (“2025 Directions”) to include non-convertible debentures/ bonds and commercial papers issued by an Indian company, each as specified in Schedule 1 to the Foreign Exchange Management (Debt Instruments) Regulations, 2019.

Any investments from SRVA are required to be counted under the corporate debt limit for foreign portfolio investors under the “General Route” and are subject to the applicable limits and conditions in the 2025 Directions. However minimum residual maturity requirements and issue-wise limits do not apply to such investments.

Foreign Exchange Management (Borrowing and Lending) (Amendment) Regulations, 2025

On 6 October 2025, RBI notified the Foreign Exchange Management (Borrowing and Lending) (Amendment) Regulations, 2025. The amendment permits an authorised dealer bank to lend in Indian Rupees to a person resident outside India, being a resident in Bhutan, Nepal or Sri Lanka, including a bank in any of these jurisdictions, for facilitating cross-border trade transactions.

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

The Reserve Bank of India (“RBI”) has issued the Commercial Banks – Credit Risk Management (Amendment) Directions, 2025 (“Directions”), replacing and updating the earlier Chapter XI of the Credit Risk Management framework to enhance prudential oversight and strengthen credit discipline in the banking system. While the Directions shall be effective from 1 April 2026, the banks have an option for earlier implementation. Key changes are as follows:

• Recognition of Cash Credit (“CC”): CC facilities are expressly recognised as working capital facilities linked to current assets.
• Exposure below INR 10 crore: The Directions allow banks to maintain current/ overdraft (“OD”) accounts without any restriction where aggregate exposure of the banking system is less than INR 10 crore.
• Exposure of INR 10 crore or more: Where aggregate exposure is INR 10 crore or more, only banks meeting the 10% aggregate or fund‑based exposure test (or, failing that, the two largest lenders / an SCB with NOCs) can maintain current/OD accounts. Other banks may only maintain collection accounts.
• Operation of collection accounts: Funds in collection accounts should be remitted within 2 (two) working days to a designated CC/current/OD account, subject to limited debits.
• Restrictions on fund flows: The Directions restrict use of such accounts as pass‑throughs for third‑party transactions and require robust monitoring to detect and prevent misuse.

Reserve Bank of India (Core Investment Companies) Directions, 2025

On 28 November 2025, RBI issued the Reserve Bank of India (Core Investment Companies) Directions, 2025 (“CIC Directions”) consolidating and replacing the existing framework for Core Investment Companies (“CICs”). Key features of CIC Directions are:

• Applicability: The CIC Directions apply to companies that hold at least 90% of their net assets as investments in group entities, of which not less than 60% is invested in equity shares (including compulsorily convertible instruments within 10 (ten) years) of group companies and specified sponsor units of InvITs, and which do not undertake any other financial activities except permitted investments, lending, or guarantees to group companies.
• Registration and compliance: Eligible CICs are required to apply for registration with RBI within a prescribed period and comply with directions relating to governance, reporting and disclosure.
• Investment and activity restrictions: The CIC Directions reinforce that CICs must primarily hold investments in group companies and are restricted from engaging in active financial services, trading or unrelated businesses.
• Group Governance and Reporting: CICs are required to maintain robust group governance, including oversight of group entities, and submit periodic reports and audited financials to the RBI.

Reserve Bank of India (Commercial Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025

On 28 November 2025, the RBI has notified the Reserve Bank of India (Commercial Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025 (“Wilful Defaulters Directions 2025”), replacing the earlier 2024 Master Direction on Treatment of Wilful Defaulters and Large Defaulter. While the earlier directions extended to “lender” which included All India Financial Institutions, a bank, or non-banking financial company (“NBFC“) which has granted a credit facility to any borrower, the new Wilful Defaulters Directions 2025 are dedicated set of directions on the subject matter for commercial banks (as defined under clause (c) of Section 5 of Banking Regulation Act, 1949). That said, the earlier directions and the new directions as applicable to commercial banks substantively remain the same.

Reserve Bank of India (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025

The Reserve Bank of India (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025 (“Shareholding Directions, 2025”) supersede the Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 and revise the regulatory framework governing acquisition and holding of shares or voting rights in banking companies. The applicability of the Shareholding Directions 2025 has been restricted to Commercial Banks, expressly excluding Small Finance Banks, Payments Banks and Local Area Banks (for which separate parallel regulations have been issued), which were covered earlier within the scope. That said, the earlier directions and the new directions as applicable to commercial banks substantively remain the same.

Reserve Bank of India (Non-Banking Financial Companies – Acquisition of Shareholding or Control) Directions, 2025

The Reserve Bank of India (Non-Banking Financial Companies – Acquisition of Shareholding or Control) Directions, 2025 (“NBFC Acquisition Directions, 2025”) introduce a standalone framework governing acquisition or transfer of shareholding or control of NBFCs across all regulatory layers. That said, the earlier directions and the new directions as applicable to NBFCs substantively remain the same.

Reserve Bank of India (Commercial Banks – Credit Facilities) Directions, 2025

The Reserve Bank of India (Commercial Banks – Credit Facilities) Directions, 2025 (“Credit Facilities Directions, 2025”) consolidate various existing directions and circulars governing lending framework. The applicability of the Credit Facilities Directions, 2025 has been restricted to commercial banks (banking companies other than Small Finance Banks, Payments Banks and Local Area Banks), corresponding new banks, and State Bank of India. Key features of the Credit Facilities Directions, 2025 include:

• Clarification on Digital Lending – Salary-Based Advances: Advances against salary are permitted, where the loan is disbursed to the borrower but repayment is effected by the employer through salary deduction, provided that funds flow directly from the employer to the bank without any control by lending service providers. Further, any co-lending arrangement shall be governed by the Reserve Bank of India (Commercial Banks – Transfer and Distribution of Credit Risk) Directions, 2025, and that no third party other than the lenders may control fund flows. This position did not exist under the earlier Reserve Bank of India (Digital Lending) Directions, 2025.
• Expanded framework for lending against gold: The new Credit Facilities Directions, 2025 further introduce lending against gold in line with applicable trade and monetisation policies, allowing authorised banks nominated by the Directorate General of Foreign Trade and banks participating in the Gold Monetisation Scheme, 2015 to extend gold metal loans to jewellery exporters and domestic jewellery manufacturers.

RBI Issues Prudential Norms on Declaration of Dividend and Remittance of Profits (2026)

The Reserve Bank of India (“RBI”) has issued the Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividend and Remittances of Profits) Directions, 2026 (“RBI Prudential Norms Directions”), effective from FY 2026–27, consolidating and updating the prudential framework governing profit distribution by banks. Similar directions have also been issued by the RBI for payments banks, regional rural banks, local area banks and small finance banks.

The key features of the RBI Prudential Norms Directions are (i) eligibility conditions such as compliance with capital requirements, positive adjusted profit after tax (“Adjusted PAT“), and absence of supervisory restrictions; (ii) a CET1 ratio linked payout framework, ranging from nil to 100% of Adjusted PAT (subject to an overall cap of 75% of PAT); and (iii) enhanced board oversight, requiring consideration of asset classification divergences, auditor qualifications, capital projections and growth plans.

For foreign banks operating in branch mode, the RBI Prudential Norms Directions permit profit remittance without prior RBI approval, subject to compliance and reporting requirements.

RBI Revises ECB Return Filing Norms and LSF Norms

The RBI has revised reporting norms for ECB returns effective 1 April 2026. Form ECB 1 and Revised Form ECB 1 will now be treated as returns which do not capture flows. Late submission fees (“LSF“) will be computed per return, and each delayed Form ECB 2 submission under a loan registration number will be treated as a separate instance for such computation.

Authorised dealer (“AD“) banks are required to submit complete returns to the RBI within 7 days of receipt. LSF, if applicable, is payable to the RBI upon receipt of acknowledgment from RBI regarding receipt by it of the return, and AD banks are responsible for monitoring LSF payment by borrowers.

RBI amends Foreign Exchange Management (Borrowing and Lending) Regulations

The RBI, on 9 February 2026, notified the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (“Amendment Regulations”) to govern the external commercial borrowing (“ECB”) framework. Earlier, the ECB framework was governed by the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations.

Key changes introduced in the Amendment Regulations are:

• Eligible Borrower: Under the Amendment Regulations, eligible borrowers include any person resident in India (other than individuals) incorporated or registered under any central/ state act; entities under restructuring or insolvency may raise ECB if permitted under the plan. Under the earlier framework, eligible borrowers were limited to entities eligible to receive FDI and specified entities such as port trusts, SEZ units etc., with INR ECB extended to certain entities engaged in microfinance.
• Eligible Lender: Under the earlier regime, eligible lenders were limited to those in FATF/IOSCO-compliant jurisdictions, with specific restrictions on individuals (foreign equity holders) and foreign branches/ subsidiaries of Indian banks. In contrast, the Amendment Regulations permit raising ECB from any person resident outside India, overseas branches of RBI-regulated entities, and IFSC-based financial institutions.
• MAMP: Under the Amendment Regulations, ECBs are required to be raised with a minimum average maturity period (“MAMP“) of 3 years, with a relaxation for manufacturing sector borrowers who may raise ECBs with a MAMP of 1–3 years (subject to the outstanding amount not exceeding USD 150 million). Under the earlier regime, while the average MAMP was also 3 years, deviations (ranging from 1 to 10 years) were prescribed based on specific end-use categories.
• Borrowing limit: A borrowing limit of the higher of (a) outstanding ECB up to USD 1 billion, or (b) total outstanding borrowing up to 300% of net worth has been introduced, with an exemption for entities regulated by financial sector regulators.
• Cost of borrowing: The cost of borrowing must be in line with prevailing market conditions, and for ECBs with MAMP less than 3 years, the cost ceiling applicable to Trade Credit applies.

In addition to the above, the Amendment Regulations have introduced general end-use restrictions of funds borrowed under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

RBI Issues NBFC – Income Recognition, Asset Classification and Provisioning (Amendment) Directions, 2026 in relation to Default Loss Guarantee

The RBI has issued the NBFC – Income Recognition, Asset Classification and Provisioning (Amendment) Directions, 2026, on 13 February 2026 with immediate effect, introducing provisions for loan portfolios covered by default loss guarantee (“DLG“) arrangements. NBFCs may consider DLG while determining provisions under the expected credit loss (“ECL“) framework, subject to IndAS requirements. NBFCs are required to comply with IndAS disclosure norms, and recompute ECL provisions upon each invocation of DLG, as the available cover reduces accordingly.

Amendments to Prudential Norms on Capital Adequacy for NBFCs

The RBI has issued certain amendments to the prudential norms on capital adequacy on 10 March 2026 with immediate effect. The major changes implemented are summarized below:

• Revision of “Owned Fund”: The scope of owned funds for NBFCs has been expanded by including quarterly profits under free reserves, provided that the financial statements be subjected to limited audits on a quarterly basis. Furthermore, a formula for calculation of quarterly profits has also been laid down. Losses in the current year shall be fully deducted from Owned Fund.
• Similar amendments: Similar amendments as above have been carried out, for regulatory consistency, to the Reserve Bank of India (Housing Finance Companies) Directions, 2025, the Reserve Bank of India (Core Investment Companies) Directions, 2025, the Reserve Bank of India (Mortgage Guarantee Companies) Directions, 2025 and the Reserve Bank of India (Asset Reconstruction Companies) Directions, 2025.

Reserve Bank of India (Commercial Banks – Cash Reserve Ratio and Statutory Liquidity Ratio) Amendment Directions, 2026

The RBI, on 22 January 2026, issued the Commercial Banks – Cash Reserve Ratio and Statutory Liquidity Ratio Amendment Directions, 2026 to align the existing RBI (Commercial Banks – Cash Reserve Ratio and Statutory Liquidity Ratio) Directions, 2025 (“CRR Directions”) with recent legislative and regulatory changes following the enactment of the Banking Laws (Amendment) Act, 2025.

Key amendments are as follows:

• Expansion of eligible institutions: Under the CRR Directions, the scope of exclusions from cash reserve ratio and statutory liquidity ratio computation has been expanded to include borrowings from all development financial institutions (as defined under the RBI Act, 1934), in addition to the previously specified institutions.
• In Annex I (Form A of the CRR Directions, which captures a bank’s position at the end of each fortnightly reporting) and Annex II (Form VIII of the CRR Directions, which sets out the detailed liability classification and reporting format for regulatory returns), the earlier references to the National Bank for Agriculture and Rural Development (“NABARD“) and the Export-Import Bank of India have been replaced with a broader list of institutions, including the Exim Bank, National Housing Bank, NABARD, Small Industries Bank, National Bank for Financing Infrastructure and Development, and other development financial institutions.
• Further in Annex II, Form VIII of the CRR Directions, “Amount deposited with the Reserve Bank under the Standing Deposit Facility Scheme” has been inserted, requiring the banks to separately report funds placed under the standing deposit facility.

For more information contact:

Jhinook Roy
Partner & Practice Head – Finance
jhinook.roy@veritaslegal.in

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