Demand and Call Loans: Is Your NBFC Compliant with RBI's Regulatory Expectations?

Demand and Call Loans have traditionally been viewed as flexible lending instruments, allowing lenders to recall the facility at any time. However, unrestricted discretion in recalling such loans or structuring repayment terms can expose borrowers to uncertainty and increase operational as well as governance risks.

Recognising these concerns, the Reserve Bank of India has prescribed specific regulatory expectations governing the sanction, review and administration of Demand and Call Loans. While these requirements may appear straightforward, they are often overlooked during policy formulation and loan documentation.

This article discusses the key compliance requirements applicable to NBFCs and the practical steps necessary to ensure regulatory compliance.

What is a Demand and Call Loan?

A Demand and Call Loan is a credit facility that is repayable on demand or after a notice period specified by the lender. Unlike term loans, these facilities generally do not have a fixed repayment schedule and are intended to provide liquidity with flexibility.

However, flexibility should not translate into regulatory ambiguity. RBI expects NBFCs to establish a transparent framework governing such facilities.

Key RBI Compliance Requirements:

The following table summarises the principal compliance requirements under the RBI framework:

Compliance Requirement	RBI Expectation	Suggested Internal Responsibility*
Formulate a Board-approved policy governing Demand and Call Loans	The Board should approve a policy governing sanction, review and monitoring of Demand and Call Loans.	Board of Directors
Prescribe the cut-off date for recalling Demand and Call Loans	The policy should clearly specify the recall period.	As specified in the Board-approved policy
Record reasons where the recall period exceeds one year	Deviations should be properly documented.	Loan Sanctioning Authority
Specify periodicity of interest servicing	The loan documentation should clearly specify the frequency of interest servicing.	Loan Sanctioning / Business Function
Record reasons where interest servicing is waived or deferred	Appropriate justification should be documented.	Loan Sanctioning Authority
Periodically review outstanding Demand and Call Loans	Loans should be reviewed in accordance with the Board-approved policy.	Credit Monitoring / Business Function
Conduct review before renewal	Renewal should be based on a fresh assessment.	Loan Sanctioning Authority

*The exact internal responsibility may vary depending on the NBFC's Board-approved governance framework, delegation of powers and credit policy.

Why These Requirements Matter?

Demand and Call Loans are susceptible to governance concerns because repayment depends largely upon the lender's discretion. Without an appropriate internal framework, there may be inconsistencies in:

• Recall decisions;

• Interest servicing arrangements;

• Credit monitoring;

• Renewal practices;

• Documentation standards.

RBI therefore expects NBFCs to adopt a policy-driven approach instead of relying solely on contractual flexibility.

Common Compliance Gaps Observed:

During internal compliance reviews, organisations frequently encounter issues such as:

• Absence of a separate Board-approved policy for Demand and Call Loans.

• Loan agreements lacking a clearly defined recall notice period.

• Inadequate documentation supporting deviations from standard repayment terms.

• Automatic renewals without documented credit assessment.

• Failure to record periodic reviews of outstanding facilities.

• Inconsistent interest servicing clauses across loan documents.

Although these issues may appear operational in nature, they often reflect broader governance deficiencies.

Best Practices for NBFCs:

To strengthen compliance, NBFCs should consider the following measures:

1. The Board-approved Loan Policy should incorporate the framework governing Demand and Call Loans.

2. Clearly define:

• Eligible borrowers;

• Approval hierarchy;

• Recall procedure;

• Notice period;

• Interest servicing mechanism;

• Renewal process;

• Documentation requirements.

3. Maintain evidence of periodic portfolio reviews.

4. Ensure every deviation from the policy is supported by documented approval and justification.

5. Include Demand and Call Loan compliance within the scope of Internal Audit and Compliance Testing.

6. Periodically train business and credit teams on the applicable regulatory requirements.