The central bank on Friday said it would allow banks to allocate up to 15 percent of their lending to NBFCs that do not finance infrastructure projects, up from an earlier limit of 10 percent. The move is effective up to Dec. 31, the Reserve Bank of India said in a statement.

The relaxation in lending norms by RBI follows worries over tightening credit lines to NBFCs after a series of defaults at India's Infrastructure Leasing & Financial Services Ltd (IL&FS), spooked markets and led to a major sell-off in the stocks of many NBFCs.

Earlier this month, the Indian government stepped in to take control of IL&FS saying it feared its collapse would cause "catastrophic" damage to the financial markets and the economy.

This week a loan default by real-estate developer Supertech, based in New Delhi, has further panicked investors, leading to further sell-offs in NBFCs with any potential exposure to real estate.

Shares in Dewan Housing Finance Corp Ltd closed down 10.75 percent on Friday, while shares in Indiabulls Housing Finance and Edelweiss Financial Services Ltd fell 17.1 percent and 8.7 percent respectively.

Indian markets were shut on Thursday, but Friday's sell-off came on top of prior declines in the stocks on Wednesday.

Supertech's chairman told a local newspaper on Wednesday that Supertech had overshot its loan service deadline by 15 days to two state-run banks, but he said the firm was still servicing its debt from NBFCs regularly.

This followed an Oct. 10 downgrade of its loan facilities by ratings agency Brickwork Ratings which slashed its 18.66 billion rupees ($253.91 million) of bank loans to junk, citing cashflow mismatches on account of a slowdown in the real estate sector.

"There is lot of fear and uncertainty among investors and any such default news which could lead to a credit loss is creating more uncertainty," said Ajay Manglunia, head of fixed income advisory at Edelweiss Financial Services.

"Clearly this shows that investors don't have any more appetite for credit losses in the non-bank finance space."

(Additional reporting by Tanvi Mehta in Bengaluru and Manoj Kumar in New Delhi and Swati Bhat in Mumbai; Writing by Euan Rocha; Editing by Subhranshu Sahu and David Evans)

By Suvashree Choudhury and Promit Mukherjee