RBI Lets Shadow Lenders, Companies Into Term Money Market

The Reserve Bank of India wants to open its term money market to non-bank lenders and corporations. Draft rules published Thursday would let non-banking finance companies, including mortgage providers, trade as both borrowers and lenders. Companies can lend cash but cannot borrow. Smaller NBFCs are excluded from the proposal.

The central bank first flagged the idea in its April policy statement. Comments on the draft are due July 17, 2026.

Today only banks and standalone primary dealers can participate in the term money market, subject to prudential limits. The RBI has been pushing for broader participation in the unsecured overnight call money market for over a year. That market remains the central bank's key policy target. Current money markets are dominated by banks and primary dealers, with daily turnover topping $70 billion.

NBFCs have relied heavily on bank borrowing and bond issuance for funding. Direct access to the term money market gives them an alternative source of short-term liquidity. That could lower their funding costs and tighten the spread between the repo rate and the rates they charge borrowers. The mechanism is straightforward: NBFCs borrow at market rates, set lending margins, and pass through policy changes faster. A wider money market should improve the transmission of RBI rate decisions.

Companies that lend gain a new venue for surplus cash. They park funds at market rates instead of leaving them in current accounts or bank deposits. The money flows back into the system, adding depth.

Prudential limits for shadow lenders are set at 200% of net-owned funds as of the previous fiscal year. For financial institutions, limits will follow whatever the RBI's regulation department prescribes. Smaller NBFCs that fall below a certain size threshold are left out entirely, though the central bank did not specify the cutoff.

Banks and primary dealers currently earn margins from dominating the market. Adding NBFCs and corporate lenders will squeeze those margins. The trade-off is a more liquid money market that better reflects the RBI's policy stance. The $70 billion daily turnover could grow as new participants bring additional volume.

The exclusion of smaller NBFCs means the deepest impact will hit the larger shadow lenders first. Those with enough net-owned funds to use 200% leverage will feel the benefits most. Smaller firms will continue relying on bank credit and bond markets until the RBI expands eligibility further.

Comments are due by July 17. The central bank will then decide on final rules. If adopted as drafted, the proposals mark a step toward reducing India's dependence on bank intermediation for short-term funding.