"There will, however, be no change in the instructions prohibiting grant of bridge loans to NBFCs and RNBCs (residuary non-banking companies) or loans of a bridging nature in any form to these companies including those against capital/debenture issues," the RBI release said.

While welcoming the RBI notification, NBFC sources said that it will improve the funds position in the industry and make cheaper funds available for disbursals, particularly to the vehicle finance and hire-pruchase sector.

"With this notification, the RBI intends to revive the NBFC sector and it is now up to the banks to use this opportunityand park their surplus funds into more profitable avenues than SLR securities," Association of Leasing and Financial Companies (ALFS) executive director Mahesh Thakkar said. The RBI registration of the NBFCs should infuse more confidence in the banking system, he added.

"Banks disbursing loans to this sector through NBFCs has the dual-advantage of faster disbursals, and a 100 per cent recovery, as the NBFC has to stand guarantee for the loans and asset repossesion from defaulters is much faster in the NBFC sector, thereby minimising the losses. This means that the RBI notification should lead to more (and cheaper) funds for the top rated NBFCs," Thakkar said.

Earlier, the bank credit to NBFCs (other than RNBCs) registered with RBI, which have not met the requirements of credit rating and prudential norms, was restricted to a certain multiple of their net owned funds (NoF).

"As regards bank finance to the NBFCs which do not require to be registered with the Reserve Bank of India --insurance companies,nidhi companies, chit fund companies, stock broking/merchant banking companies and housing finance companies, banks may take the credit decisions on the basis of factors such as purpose of credit, nature and quality of underlying assets, repayment capacity and the bank's risk perception," the release said.

However, the release added that in respect of RNBCs registered with the RBI, bank finance will continue to be restricted to the extent of their NoF. "Banks are also not allowed to give credit to NBFCs in respect of bill discounting/rediscounting (except for those arising from the sale of commercial vehicles), investment made by NBFCs in shares/debentures of a current nature, investment of NBFCs in and advances to subsidiaries, group companies or other entities and investment of NBFCs in other companies and inter-corporate loans/deposits in other companies," the RBI release said.