The Reserve Bank of India (RBI) has widened the scope of related party transaction norms to cover promoters, key management personnel (KMPs), shareholders holding over 5 per cent equity, and their relatives or associated entities. The move, detailed in a draft circular released on Friday, aims to strengthen governance and curb conflicts of interest in bank lending practices.
Earlier, the guidelines primarily restricted lending by banks to their directors or entities in which those directors held interests. The revised framework, effective from 1 April 2026, consolidates and replaces more than a dozen existing circulars, creating a unified regulatory structure.
The new norms also introduce scale-based thresholds that require board approval for loans and advances to related parties once they exceed specified limits. At the same time, the RBI has provided certain exemptions. For instance, advances to public trusts are allowed if a trustee also serves as a director of the lending bank. Loans to directors backed by government securities, life insurance policies, or fixed deposits will be permitted if the loan-to-value ratio does not exceed 100 per cent of the realisable value.
Personal loans and advances to employee-directors are allowed if they fall under employee benefit norms. Similarly, directors and CEOs can avail loans, excluding those for investment in financial assets, subject to prudential limits and loan-to-value ratios. Non-fund-based facilities to directors or their related parties are allowed if fully secured by cash collateral of equal or higher value.
However, the RBI has prohibited foreign bank branches in India from lending to Indian companies where a director on the foreign bank’s board abroad has an interest in the firm or its parent company.
The updated framework requires stronger internal controls, including board-level oversight, mandatory recusal of interested directors, and quarterly internal audits. Statutory auditors must also review such transactions, and banks are required to disclose their top related party exposures and provisioning details in their financial statements. |
