In alignment with its continuous efforts to strengthen governance and transparency across the financial sector, the Reserve Bank of India (RBI) has issued a draft regulatory framework on lending to related parties by various Regulated Entities (REs). This move follows the announcement made in the Statement on Developmental and Regulatory Policies dated December 8, 2023, and aims to create a harmonised, principle-based approach to related party transactions across financial institutions.
Who Is Covered?
The draft directions apply to a wide spectrum of entities regulated by the RBI, including:
- Commercial Banks
- Small Finance Banks
- Regional Rural Banks
- Local Area Banks
- Urban Co-operative Banks
- Rural Co-operative Banks
- Non-Banking Financial Companies (NBFCs)
- All India Financial Institutions (AIFIs)
By encompassing such a broad group of financial institutions, the RBI seeks to bring consistency, reduce regulatory arbitrage, and ensure uniform standards of prudence in lending to related parties.
Key Highlights of the Draft Directions
- Materiality Thresholds and Board Oversight
The draft introduces scale-based thresholds, above which lending to related parties must receive approval from the Board or a designated committee. This provision ensures governance accountability while avoiding unnecessary restrictions on smaller, low-risk transactions. - Refinement in Definition of Related Parties
In a welcome rationalisation, Independent Directors of other banks are proposed to be excluded from the definition of ‘related persons’. This aligns with good governance practices and encourages participation of independent directors without conflict-of-interest concerns. - Principle-Based Exemptions
The RBI proposes exemptions from Section 20(1)(b) of the Banking Regulation Act, 1949 for certain lending transactions based on sound principles. This would offer greater operational flexibility to REs, especially where risks are minimal and safeguards are in place. - Enhanced Reporting and Disclosures
The draft mandates supervisory reporting and public disclosures for lending to related parties. This ensures that all such transactions are monitored, auditable, and transparent to regulators and stakeholders.
Why It Matters
Lending to related parties has long been a sensitive issue in the financial world. When not properly governed, it can lead to conflicts of interest, concentration of risk, and potential misuse of funds. By introducing a balanced, risk-sensitive framework, the RBI is reinforcing the message that strong governance is non-negotiable, even as it allows room for operational practicality.
This initiative is particularly timely as financial institutions continue to grow in size, complexity, and interconnections—both within and outside their group structures. A harmonised framework also makes regulatory supervision more efficient and consistent across sectors.
Public Consultation Open Until October 31, 2025
The RBI has invited public comments and stakeholder feedback on the draft Directions until October 31, 2025. Inputs can be submitted via the ‘Connect2Regulate’ section on the RBI’s website or sent directly to the Chief General Manager, Credit Risk Group, Department of Regulation, either by post or email.
Looking Ahead
Once finalised, this framework is expected to standardise risk management practices for related party lending and boost investor confidence in the governance standards of Indian financial institutions.
As India moves towards a more mature and accountable financial system, frameworks like these will play a crucial role in balancing financial innovation with robust regulation.