Summary of this article
RBI standardises related party lending rules across banks and NBFCs
Boards face tighter oversight, approval, and disclosure responsibilities
Framework aims to curb governance risks and conflict driven lending
The Reserve Bank of India (RBI) has laid out new amendment directions to tighten how regulated entities lend to related parties. The new rules are applicable to all commercial banks, small finance banks, regional rural banks, cooperative banks, all India financial institutions, and non-banking finance companies (NBFCs).
The move follows the RBI's draft framework released in October 2025. After receiving stakeholders' responses, RBI has now come up with a harmonised and principle-based structure to handle lending to related parties.
Who are Related Parties and Why are They Important
Related parties include promoters, directors, key managerial personnel, their relatives, and entities in which they have significant influence or control. Lending to such parties carries a higher risk because of the possibility of conflict of interest. Weak controls in this area, in the past, have led to excessive exposure, misjudgement of credit and in some cases, financial stress among lenders.
The updated structure of RBI attempts to alleviate these risks by making sure that lending to related parties is done with greater transparency, on an arm's length basis, and with stronger supervision by the boards.
What's Different in the New Framework
One of the major changes is introducing uniform norms across different types of regulated entities. Previously, regulations used to depend on the type of lender, whether it was a bank, an NBFC, or a cooperative institution. The new directions bring about uniform definitions, approval procedure and also disclosure requirements within the system.
Boards of regulated entities now have a larger role. Any lending to related parties should be supported by a definite policy accepted by the board. The policy should establish checkpoints, pricing guidelines and protocols to make sure that such loans do not favour it better than those given to unrelated borrowers.
The standards of governance are also enhanced by the amendments. The transactions with related parties involving lending need to be reviewed periodically, and the board members, if interested in a transaction, must abstain from discussions and decisions related to it.
Tighter Limits and Enhanced Risk Management
Lending to related parties has been closely interconnected with the current credit risk management standards by the RBI. The exposures to similar parties will be handled with stricter internal limits and increased monitoring. These exposures may be looked at in greater detail in large exposure structures in certain instances.
To NBFCs and cooperative banks, which have experienced a booming growth in recent years, the revisions have brought their practices close to those used by commercial banks. This reduces regulatory arbitrage and the loopholes in regulation.
Improved Disclosure Requirements
The other significant change is associated with disclosures. All regulated parties will have to display specific and transparent information on related party lending in the financial statements. This will include the type of relations, outstanding amounts, and the conditions of lending.
These disclosure requirements are targeted at enhancing transparency among depositors, investors and regulators. They also contribute to easier identification of concentration risks which may arise from connected lending.
Significance of the Timeline
RBI has repeatedly highlighted governance and risk management weaknesses as a concern, especially in institutions with concentrated ownership or promoter influence. By tightening related party lending norms, the central bank is aiming at reducing misuse of funds and also making sure the decision on credit is made on merit and not on association.
The framework also compares the domestic regulation with the international best practice regarding corporate governance and banking oversight.
Implications for Borrowers and Lenders
The changes imply greater internal controls and increased compliance requirements for regulated entities. Board/senior management will have to show more attention to the identification, approval and disclosure of related party exposures.
To those borrowers that fall within the related party classification, credit could become more formal and stricter. Nevertheless, the RBI has not banned such lending. Rather, it has concentrated on making sure it occurs with appropriate safeguards in place.
