The Reserve Bank of India (RBI) has released a draft unified framework for related party lending, expanding its scope to include promoters, key management personnel (KMPs), major shareholders, and their relatives. The move aims to enhance governance and reduce conflicts of interest in bank lending. Effective from April 1, 2026, the revised norms consolidate over a dozen legacy circulars and introduce stricter board oversight and disclosure requirements.
Core Development
The framework broadens “related party” to include entities with significant influence (5%+ equity).
Sets materiality thresholds:
₹50 crore for banks with assets over ₹10 lakh crore,
₹10 crore for banks between ₹1–10 lakh crore,
₹5 crore for smaller banks.
Loans above thresholds need board approval or committee clearance.
Allows limited exemptions for loans backed by government securities, FDs, or insurance policies.
Bans foreign bank branches in India from lending to Indian firms where a board member abroad has an interest.
Mandates quarterly internal audits and statutory auditor reviews of all such transactions.
Key Drivers / Issues
Strengthen corporate governance and transparency in banking.
Curb insider influence and potential conflict of interest.
Align Indian banking practices with global prudential norms.
Enhance public trust in regulated financial institutions.
Stakeholder Impact
For banks and NBFCs, the move tightens scrutiny on related-party exposures. Directors and promoters face higher disclosure obligations, while auditors gain a formal role in oversight. For regulators, the framework improves visibility into intra-group lending risks.
Industry & Policy Reactions
Experts welcomed the draft, calling it a step toward “transparent governance in connected lending.” Industry analysts said the clarity will help prevent misuse of directorial positions and strengthen fiduciary discipline.
Challenges Ahead
Implementing consistent board-level recusal processes.
Avoiding compliance fatigue from overlapping governance requirements.
Ensuring timely audits and public disclosures.
Strategic Outlook
The unified framework consolidates decades of fragmented rules into a single, transparent structure, marking a major shift toward risk-based governance. It enhances the credibility of India’s financial system ahead of expected global regulatory harmonisation.
Why This Matters
By tightening rules on insider-linked lending, RBI aims to strengthen governance, transparency, and accountability—key pillars for sustainable banking reform in India.
