RBI proposes revised framework for lending to related parties

Mumbai, Oct 3 (PTI) The Reserve Bank on Friday proposed a framework with objectives of ensuring prudence while allowing operational flexibility to banks when they lend to related parties.

The RBI has issued draft 'Reserve Bank of India (Lending to Related Parties) Directions, 2025' with the aim to provide a harmonised, principle-based framework to be adopted by regulated entities (REs) for inter alia lending to related parties.

The draft introduces scale-based materiality thresholds beyond which lending to related parties of an RE would need approval of the board or its committee.

As per the proposal, lenders with an asset size of Rs 10 lakh crore would require board approval to sanction loans beyond Rs 50 crore.

In case the asset size of a lender is between Rs 1 lakh and Rs 10 lakh, the threshold would be Rs 10 crore. For banks with assets of less than Rs 1 lakh crore, the ceiling would be Rs 5 crore.

The RBI has sought comments on the draft direction from the public and stakeholders by October 31, 2025.

The central bank said lending to counterparties who are related or connected to the lending bank, either through ownership stake in the bank or through their ability to control and influence lending decisions, may prove detrimental to the interests of the bank and other stakeholders.

Globally, there are regulations on such related-party lending and transactions that may create conflicts of interest or moral hazard for banks.

The Banking Regulation Act, 1949, places explicit statutory restrictions on lending by banks to their directors and entities in which directors have an interest.

In addition, various regulations have been issued over the years governing lending by banks to relatives of directors, to directors of other banks and their relatives, to senior officers and their relatives and associated entities of such persons, the RBI said.

"As related parties can be many entities other than what is covered under extant statutory or regulatory restrictions, direct or indirect lending to such related parties remains a regulatory concern. Accordingly, the extant guidelines have been reviewed," the draft said.

The proposed directions have been set out to lay down the revised regulatory guidelines for all commercial banks, comprehensively addressing the above concerns in a harmonised manner, the RBI said. PTI NKD NKD SHW