Every business in India operates within a banking and finance legal framework whether structuring a working capital loan, issuing debentures, registering an NBFC, or recovering dues from a defaulting counterparty. That framework spans the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and the Insolvency and Bankruptcy Code, 2016 (IBC). Altacit Global’s banking and finance practice advises businesses, lenders, and NBFCs on structuring, compliance, and recovery across each layer of this framework.
Key Takeaways
- India’s banking and finance regulation operates across five primary statutes: the Banking Regulation Act, 1949; the RBI Act, 1934; SARFAESI, 2002; the Recovery of Debts and Bankruptcy Act, 1993; and the IBC, 2016.
- Banks and NBFCs operate under distinct regulatory regimes NBFCs cannot accept demand deposits and are regulated under a tiered, scale-based framework introduced by RBI in 2023 and updated through 2025.
- RBI’s Digital Lending Guidelines mandate direct disbursal to the borrower’s bank account, a Key Fact Statement before loan execution, and a cooling-off period for exit without penalty.
- Secured creditors have three principal recovery routes: SARFAESI (fastest, no court required initially), DRT proceedings (for dues above ₹20 lakh), and IBC’s Corporate Insolvency Resolution Process (time-bound at 330 days).
- Altacit Global advises clients on loan documentation, RBI compliance, SARFAESI and DRT proceedings, and debt recovery strategy from offices in Chennai, Bangalore, Hyderabad, Kochi, and Coimbatore.
What Laws Govern Banking and Finance in India?
India’s banking and finance legal framework is not a single statute. It is a layered system where the applicable law depends on the entity type, the transaction, and the enforcement route chosen. Below is a structured overview of each primary law.
Banking Regulation Act, 1949: What Does It Govern?
The Banking Regulation Act, 1949 governs every bank licensed by the Reserve Bank of India. It sets minimum capital requirements, branch licensing rules, management restrictions (including fit-and-proper criteria for directors), and RBI’s supervisory powers over licensed banks.
The Act applies to scheduled commercial banks, cooperative banks, and small finance banks. It does not apply to NBFCs, which operate under a separate framework discussed below.
Reserve Bank of India Act, 1934: What Is RBI's Legal Authority?
The Reserve Bank of India Act, 1934 establishes RBI’s mandate to regulate money supply, credit, and the broader financial system. RBI’s authority to issue Master Directions, the primary source of day-to-day compliance obligations for both banks and NBFCs flows directly from this Act.
Any new RBI direction on digital lending, NBFC classification, or interest rate disclosure derives its legal basis from the RBI Act.
SARFAESI Act, 2002: How Can Secured Creditors Recover Without Court Intervention?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 allows secured creditors banks and notified financial institutions to take possession of secured assets and sell them to recover dues without filing a civil suit or approaching a court initially.
SARFAESI is the fastest enforcement route for secured lenders. For a full procedural guide to SARFAESI including notice timelines, the 60-day borrower response window, and Debt Recovery Tribunal appeals refer to our dedicated SARFAESI guide.
Recovery of Debts and Bankruptcy Act, 1993: What Is the DRT Threshold?
The Recovery of Debts and Bankruptcy Act, 1993 established Debt Recovery Tribunals (DRTs) to adjudicate recovery claims by banks and financial institutions for dues exceeding ₹20 lakh. DRT proceedings are faster than civil court litigation, with defined timelines for filing, service, and adjudication.
DRTs also hear appeals under SARFAESI where borrowers challenge a secured creditor’s enforcement action.
Insolvency and Bankruptcy Code, 2016: When Is IBC the Right Route?
The Insolvency and Bankruptcy Code, 2016 provides a time-bound Corporate Insolvency Resolution Process (CIRP), capped at 330 days including litigation extensions. Financial creditors including banks and debenture holders can trigger CIRP against a corporate debtor that has defaulted on a debt of ₹1 crore or more.
IBC is distinct from SARFAESI and DRT: it aims at resolution of the debtor as a going concern, not merely recovery of a specific debt.
RBI NBFC Master Directions: What Is Scale-Based Regulation?
RBI’s Master Directions on Non-Banking Financial Companies, updated under the Scale-Based Regulation framework (2023–2025), govern NBFCs based on their size, systemic importance, and risk profile. Classification determines capital adequacy norms, governance requirements, board composition rules, and disclosure standards. For a complete guide to NBFC registration, classification, and compliance obligations, refer to our NBFC guide.
Banks vs. NBFCs: What Is the Core Regulatory Distinction in India?
Banks and NBFCs both lend money. The regulatory treatment, however, differs significantly across licensing, deposit-taking, payment systems access, and minimum capital requirements.
Feature | Bank | NBFC |
Licence | Banking licence (RBI) | Certificate of Registration (RBI) |
Can accept demand deposits | Yes | No (most categories) |
Access to payment and settlement system | Yes | No |
Deposit insurance (DICGC) | Yes | No |
Minimum capital | ₹500 crore | ₹10 crore (Net Owned Funds) |
Regulatory intensity | Highest | Scale-based (tiered) |
The prohibition on demand deposits is the most operationally significant distinction. NBFCs cannot offer savings or current accounts. They can accept certain public deposits if specifically registered to do so, but this is a narrow category with additional conditions.
For businesses deciding whether to structure their lending operations as an NBFC or through a bank tie-up, the Net Owned Funds (NOF) minimum of ₹10 crore is the threshold at which RBI registration becomes mandatory.
How Does RBI's Scale-Based Regulation Work for NBFCs? (2025 Update)
RBI introduced Scale-Based Regulation for NBFCs in 2023 and has updated classification criteria and compliance expectations through 2025. The framework divides NBFCs into four layers based on asset size, systemic interconnectedness, and nature of activities.
The four NBFC layers are:
- Base Layer (NBFC-BL): Smaller NBFCs with assets below the prescribed threshold. Lighter regulatory requirements, no mandatory board-level risk and compliance committees, simpler disclosure standards.
- Middle Layer (NBFC-ML): Larger NBFCs, including those accepting public deposits, infrastructure finance companies, and standalone primary dealers. Enhanced governance, mandatory internal audit, and higher capital adequacy norms apply.
- Upper Layer (NBFC-UL): Systemically significant NBFCs identified by RBI annually. Regulation in this layer is substantially equivalent to bank-like standards, including leverage caps and enhanced public disclosures. RBI publishes the Upper Layer list each year.
- Top Layer (NBFC-TL): Reserved for NBFCs posing extreme systemic risk. As of 2025, the Top Layer remains empty. RBI has signaled it would populate this layer only in exceptional circumstances.
Classification into the Upper Layer triggers the most significant compliance shift for an NBFC: board-approved policies on internal capital adequacy assessment, mandatory listing requirements for certain categories, and group entity reporting.
What Are RBI's Digital Lending Guidelines and Who Do They Apply To?
RBI’s Digital Lending Guidelines, issued in 2022 and updated through 2025, apply to all regulated entities – banks, NBFCs, and lending service providers (LSPs) that originate or facilitate digital loans.
The four core requirements are:
- Direct disbursal: Loan funds must be credited directly to the borrower’s bank account. Disbursals through a pass-through pool account of the LSP are prohibited.
- Key Fact Statement (KFS): Lenders must provide a standardized KFS to the borrower before loan execution. The KFS must disclose the Annual Percentage Rate (APR) and all charges in a prescribed format.
- Cooling-off period: Borrowers can exit a digital loan within a specified period after disbursal without incurring a prepayment penalty. The period varies by loan tenor and lender category.
- Data localization and consent: Only minimal necessary data may be collected, it must be stored in India, and collection requires express borrower consent.
For fintechs and digital lenders that also process personal data under the Digital Personal Data Protection Act, 2023, the compliance obligations overlap significantly. See our DPDP overlay article for how both frameworks interact.
What Should a Commercial Loan Agreement Include Under Indian Law?
A well-drafted loan agreement is the first line of defense for both lender and borrower. Under Indian law, courts and DRTs look to the agreement first when resolving disputes about interest, default, or security enforcement.
Every commercial loan agreement governed by Indian law should address the following clauses:
- Interest rate structure: Whether fixed or floating, the reset trigger, reference rate (e.g., repo-linked benchmark), and spread.
- Events of default and cure periods: Specific triggers, cure windows before acceleration, and cross-default thresholds.
- Security and perfection: Description of collateral, timeline for creation, and perfection steps (e.g., CERSAI registration for mortgages, ROC charge creation for company borrowers).
- Financial covenants: Leverage ratios, Debt Service Coverage Ratio (DSCR) thresholds, and testing frequency.
- Prepayment terms: Whether permitted, the notice period, and whether a prepayment premium applies.
- Cross-default clauses: Whether default under another facility triggers default under this agreement.
- Governing law and dispute resolution: Indian law, jurisdiction, and whether disputes go to DRT, arbitration, or civil courts.
For foreign lenders extending loans to Indian companies governed by RBI’s External Commercial Borrowing (ECB) framework the structuring requirements differ materially. See our FDI and foreign investment guide for the applicable framework.
SARFAESI vs. DRT vs. IBC: Which Debt Recovery Route Should a Lender Choose?
The choice of recovery route depends on the nature of the creditor’s claim, the debtor’s status, and the outcome the creditor seeks. The comparison below covers the three principal routes.
Route | Best For | Speed | Key Feature |
SARFAESI | Secured creditor; recoverable collateral | Fast | Direct asset possession without initial court filing |
DRT | Bank/FI dues above ₹20 lakh | Moderate | Tribunal-based adjudication; enforceable recovery certificate |
IBC (CIRP) | Corporate debtor; resolution preferred over piece-meal recovery | Time-bound (330 days) | Can result in company sale, restructuring, or liquidation |
When to use SARFAESI: SARFAESI works best when the secured creditor holds registered security over identifiable assets (property, plant, receivables) and the primary goal is asset recovery. The 60-day notice period under Section 13(2) of the SARFAESI Act triggers the enforcement timeline.
When to use DRT: DRT proceedings suit unsecured or partially secured creditors or secured creditors who face borrower objections to SARFAESI enforcement where the claim exceeds ₹20 lakh. The DRT issues a Recovery Certificate enforceable by the Recovery Officer.
When to use IBC: IBC’s Corporate Insolvency Resolution Process suits financial creditors who want either a going-concern sale of the debtor or a negotiated resolution plan. The 330-day cap makes it more time-predictable than civil litigation, but less immediate than SARFAESI for asset-backed recovery.
Altacit Global advises secured and unsecured creditors on selecting and executing the most appropriate recovery route based on the specific claim, the debtor’s profile, and the available security.
Advise on Your Banking and Finance Law Matters
Altacit Global’s banking and finance practice advises lenders, borrowers, and NBFCs on loan documentation, SARFAESI and DRT proceedings, RBI compliance, and debt recovery strategy. Our corporate law team in Chennai, Bangalore, Hyderabad, Kochi, and Coimbatore applies the same rigour to financial regulation that we bring across our corporate and intellectual property practices. Contact us at info@altacit.com for a banking and finance law consultation.
Frequently Asked Questions: Banking and Finance Law in India
Q1: What is the difference between a bank and an NBFC in India?
A bank holds a banking licence from RBI and can accept demand deposits, access the payment and settlement system, and offer DICGC-insured deposits. An NBFC holds a Certificate of Registration from RBI but cannot accept demand deposits and does not have access to the payment and settlement system. The minimum Net Owned Funds for an NBFC is ₹10 crore, compared to ₹500 crore minimum capital for a new universal bank.
Q2: Does a business need RBI approval to lend money to another business in India?
Not automatically. Inter-corporate loans between non-financial companies are generally permissible under the Companies Act, 2013, subject to board approval and related-party restrictions. However, if a company lends regularly as its principal business, it may meet the criteria for an NBFC under the RBI Act, 1934, triggering mandatory registration with RBI. The test is both quantitative (asset and income criteria) and qualitative.
Q3: What is the minimum capital required to start an NBFC in India?
The minimum Net Owned Funds (NOF) required for NBFC registration with RBI is ₹10 crore, as prescribed under the Master Directions on NBFCs. Certain categories such as NBFC-MFIs, NBFC-Factors, and Infrastructure Finance Companies carry higher NOF requirements. RBI raised the baseline NOF threshold progressively between 2022 and 2025 for existing registered NBFCs on a phased compliance schedule.
Q4: Can a foreign lender give a loan directly to an Indian company?
Yes, subject to RBI’s External Commercial Borrowing (ECB) framework. Foreign loans to Indian borrowers must comply with prescribed end-use restrictions, minimum average maturity periods, and all-in-cost ceilings set by RBI. The ECB framework distinguishes between the Foreign Currency (FC) track and the Indian Rupee (INR) track. Certain end-uses including real estate and capital markets are prohibited under ECB.
Q5: What happens if a company defaults on a secured loan in India?
A secured creditor has three principal options. First, it can invoke SARFAESI, 2002 by issuing a Section 13(2) demand notice and, after 60 days, taking possession of secured assets without court intervention. Second, it can file a recovery application before the DRT if the claim exceeds ₹20 lakh. Third, if the default exceeds ₹1 crore, the financial creditor can initiate CIRP under the IBC, 2016, which is time-bound at 330 days. The routes are not mutually exclusive in their initiation, but creditors must account for statutory stays and moratoriums triggered by IBC proceedings.
