Small Finance Banks are working through one of the more detailed regulatory overhauls in recent years, with the Reserve Bank of India revising the Credit Facilities Directions that govern how these institutions lend against securities and extend credit tied to capital market activity. The Amendment Directions, dated February 13, 2026 and followed by a further Second Amendment for infrastructure lending, revise the Small Finance Banks Credit Facilities Directions, 2025, and bring a level of definitional precision and prudential structure that credit governance teams at SFBs need to internalise quickly.
For an SFB, credit governance has traditionally centred on retail and small business lending, priority sector obligations, and relatively conservative exposure norms. This revised framework pushes SFBs to build sharper capability specifically around loans against securities and capital market linked credit, areas where many SFBs have historically had limited exposure and, correspondingly, limited internal expertise. This blog walks through what has changed and what SFBs need to update in their credit governance to stay compliant.
Redefinition of Key Terms
At the core of the amendment is a redefinition of several terms that determine how lending against securities is classified and controlled. Collateral, eligible securities, capital market intermediaries, loan to value, and primary security have all been given tighter, more specific definitions under the revised framework. This matters because these terms sit at the heart of how an SFB’s credit policy determines what can be lent against, how much can be lent, and how that exposure gets classified for prudential purposes. Credit teams that have been working with looser, more generic internal definitions of these terms will need to align their policies precisely with the language now used in the Directions.
A New Framework for Loans Against Securities
The amendment introduces a structured framework specifically for loans against securities, built around several core elements. Loan to value ceilings now limit how much an SFB can lend relative to the value of the underlying security, curbing excessive leverage. Valuation norms set out how eligible securities must be valued for lending purposes, reducing the room for inconsistent or overly generous internal valuation practices. Exposure caps limit how much aggregate exposure an SFB can carry against this category of lending, addressing concentration risk directly. Specific limits also apply to financing linked to IPOs, FPOs, and ESOPs, recognising that these categories carry distinct risk characteristics tied to market timing and price volatility. Alongside these, the framework introduces stricter end-use monitoring requirements, meaning SFBs need stronger processes to verify that loan proceeds are actually used for the purpose declared at sanction.
The Directions are also explicit about what is now prohibited. Loans against an entity’s own securities, partly paid shares, securities that are locked in, Indian Depository Receipts, and short-term commercial paper or non-convertible debentures are no longer permitted as eligible collateral. SFBs with existing exposure structured around any of these categories need to review those positions carefully against the new prohibitions.
New Rules for Lending to Capital Market Intermediaries
A separate chapter under the revised Directions specifically regulates credit facilities extended to capital market intermediaries. This introduces a requirement for full collateralisation of such exposures, including specified cash components, alongside defined prudential exposure limits. The framework also restricts financing for proprietary trading activity and sets margin requirements for these facilities. Importantly, all exposures under this category are to be treated as capital market exposure, which means SFBs need to ensure their capital market exposure computation and reporting processes correctly capture this category rather than treating it separately.
Infrastructure Lending Flexibility Through the Second Amendment
Beyond the securities and capital market provisions, RBI has also issued draft Second Amendment Directions specifically permitting SFBs to lend to Infrastructure Investment Trusts registered with SEBI, subject to a defined set of prudential safeguards. Under this proposal, SFBs would need a board approved lending policy covering appraisal standards, debt service coverage ratio benchmarks, underwriting norms, internal exposure limits, and monitoring covenants specific to InvIT lending. Eligible InvITs must be listed, have at least three years of operations, show positive net distributable cash flows for the preceding two financial years, and carry no material adverse regulatory action against them. Aggregate exposure to a single InvIT and its associated special purpose vehicles or holding companies is capped at 49 percent of asset value, and loans must be fully secured, structured without bullet or balloon repayments, and backed by escrow or receivables charge safeguards. This represents a meaningful, if narrowly conditioned, expansion of the lending avenues available to SFBs.
What This Means for Credit Governance at SFBs
For SFB credit and risk teams, this framework requires action across several fronts. Credit policies need to be rewritten to reflect the new definitions of collateral, eligible securities, capital market intermediaries, loan to value, and primary security, rather than relying on legacy internal terminology. Loan against securities processes need updated LTV computation, valuation methodology, and exposure tracking to align with the new ceilings and caps, along with a review of any existing exposures that now fall under the prohibited categories. End-use monitoring processes need to be strengthened, since this is an area where SFBs may not have previously invested heavily given lower historical volumes in securities backed lending. Capital market exposure reporting needs to correctly incorporate the newly regulated CMI lending category, and boards need to approve updated policies before extending any credit under the new InvIT lending framework, if an SFB chooses to pursue that avenue.
The amendments took effect from April 1, 2026, or earlier if adopted by the bank in entirety, and any outstanding loans or guarantees as of that date are permitted to continue until maturity, while fresh or renewed facilities from that point must comply fully with the revised Directions.
Conclusion
RBI’s revised Credit Facilities Directions bring a significantly more structured and prudentially cautious approach to how Small Finance Banks handle loans against securities and capital market linked credit, while simultaneously opening a narrow, well conditioned path into infrastructure lending through InvITs. For SFB credit governance teams, the priority now is precision, aligning internal definitions, valuation practices, exposure tracking, and end-use monitoring exactly with the language and limits set out in the Directions, rather than treating this as a minor policy update. Institutions that move early to close these gaps will be better positioned both for regulatory review and for making sound use of the new lending avenues this framework opens up.
Build This Capability with RMAI
Understanding and operationalising a framework this detailed requires structured learning that goes beyond reading the circular once. RMAI’s Online Certificate Course in Credit Risk Management helps professionals build the credit assessment and exposure monitoring capability directly relevant to the loan against securities and CMI lending changes introduced here.
For teams responsible for translating this kind of regulatory change into policy and board level oversight, the Online Certificate Course on Governance, Risk and Compliance (GRC) connects regulatory obligations with the governance structures needed to implement them properly.
Given the exposure caps and concentration limits embedded in this framework, the Online Certificate Course in Market Risk Management builds the exposure measurement and valuation skills needed to manage loans against securities prudently.
And for professionals building the internal controls needed for end-use monitoring and exposure classification, the Online Certificate Course in Operational Risk Management rounds out the practical capability SFBs need to implement this framework well.
To explore the full range of programmes covering credit, market, operational, and enterprise risk, visit RMAI’s complete suite of risk management courses or the risk management courses page for a programme matched to your team’s needs.
