RBI Tightens Norms for Related-Party Loans: What’s Changing for Banks

The Reserve Bank of India on Monday strengthened its framework governing lending to related parties by notifying sweeping changes to credit risk management rules. The amendment lays down clearer governance, control and risk management requirements.

From now on, banks’ boards are explicitly responsible for ensuring robust mechanisms to implement policies on lending to related parties. Credit policies must include specific safeguards for such lending, including separate provisions for loans to specified employees and their relatives, along with whistleblower protections to flag unethical or irregular related-party transactions.

The amendments will take effect from April 1, 2026, though banks may adopt them earlier. Existing related-party transactions that do not comply may continue until maturity, but they cannot be renewed, reviewed or enhanced unless they meet the new requirements. Consequential amendments to financial statement disclosure norms have also been issued separately.

The revised directions tighten regulatory prohibitions by expanding restrictions on exposures to promoters, their relatives and significant shareholders. Banks are barred from having any exposure, including equity or debt investments, to promoters, their relatives, shareholders holding 10% or more equity, and entities they significantly influence or control.

Limited exemptions apply where financial institutions, banks, FPIs or mutual funds hold such stakes purely as non-strategic investments without control. Existing restrictions on lending to directors’ spouses and dependent children have also been reinforced, with lending permitted only on strict arm’s-length and commercial terms.

A new materiality threshold framework has been introduced for permitted loans to related parties. Depending on the asset size of the bank, loans above specified ceilings, ₹25 crore for large banks, ₹10 crore for mid-sized banks, or ₹5 crore for smaller banks, will attract enhanced scrutiny.

These thresholds apply at the individual transaction level and may vary by loan category as per bank policy. All loans exceeding the materiality threshold must be approved either by the Board or a dedicated Committee on Lending to Related Parties, while smaller loans may be sanctioned under delegated authority.

To prevent conflicts of interest, the directions mandate compulsory recusal. Directors, key management personnel and specified employees must abstain from discussions and decisions on loan proposals involving themselves or their related parties, including any subsequent material changes such as settlements, waivers, write-offs or resolution plans.

Monitoring and oversight requirements have also been tightened. Banks must maintain and regularly update comprehensive lists of related persons, related parties and all loans extended to them. Loans to specified employees and their relatives must be reported annually to the Board.

Internal auditors are now required to conduct periodic reviews, at least quarterly, to ensure compliance, and any deviation from policy must be reported to the Audit Committee. Structures or arrangements designed to bypass these rules, including reciprocal or quid pro quo lending, will be treated as related-party lending.

Listed banks are required to continue complying with SEBI’s LODR regulations, in addition to RBI’s prudential norms on intra-group transactions and concentration risks. The RBI has also clarified that non-compliance or circumvention of these directions will invite strict supervisory and enforcement action, including penalties, higher provisioning, forensic audits and business restrictions.