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What is the story about?
The Reserve Bank of India (RBI) has issued its Amendment Directions on Lending to Related Parties for banks, non-banking financial companies (NBFCs), cooperative banks, and All India Financial Institutions (AIFIs), tightening governance and transparency around transactions involving related parties.
The revised guidelines, which incorporate feedback received on the draft Directions issued in October 2025, will come into effect from April 1, 2026.
Under the amended directions, equity investments in related parties are excluded from the scope of these regulations, while investments in debt instruments of related parties remain covered. The
RBI has also exempted
certain categories of NBFCs—specifically those that do not access public funds and have no customer interface—as well as Core Investment Companies (CICs) that primarily lend to group companies, from these guidelines.
To ensure a smooth transition, the RBI has allowed existing non-compliant related-party transactions to continue until any enhancement, renewal, re-pricing, or modification of their terms. However, such exposures cannot be renewed or reviewed unless they are fully compliant with the new rules. This approach replaces the earlier proposal of a one-year run-off period to ensure non-disruptive implementation.
The directions also introduce stricter disclosure requirements, mandating that regulated entities report the aggregate value of contracts and arrangements with related parties in their financial statements. While some stakeholders had suggested excluding contracts from disclosure, the RBI noted that contracts can be a channel for undue benefits to related parties and therefore must remain under regulatory oversight.
A key feature of the amendment is the expanded definition of related parties, aligning it with the Companies Act, 2013, and relevant provisions of the Insolvency and Bankruptcy Code (IBC).
For both banks and NBFCs, related parties now include promoters, directors, key managerial personnel and their relatives, and shareholders holding more than 10 percent of equity. The definition further extends to entities where related parties exercise significant influence or control, trust structures where related persons are trustees, authors, or beneficiaries, and introduces the concept of reciprocally related persons for banks. Professional advice or instructions provided in a professional capacity are explicitly excluded from the definition.
The RBI has also revised terminology, replacing “senior officer” with “specified employee,” defined as an employee up to two levels below the Board, providing clarity and flexibility for internal grading structures. For foreign bank branches operating in India, statutory restrictions on lending apply to directors at both the local branch and global head office levels, in accordance with Section 20(1)(b) of the Banking Regulation Act, 1949.
On exposure limits, the amended directions replace the term “substantial interest” with “significant influence and control,” reducing ambiguity and ensuring alignment with accounting standards. Non-strategic holdings by mutual funds, other banks, insurance companies, and foreign portfolio investors are specifically exempted from the restrictions, provided they do not exercise control over the bank.
For Rural Cooperative Banks, the RBI has maintained legislative intent under Section 20(1)(b), rejecting requests to exempt agricultural and allied activity loans granted to directors.
A new materiality threshold framework has been introduced to ensure proportionality. For banks, thresholds vary by asset size: banks with assets over ₹10 lakh crore have a ceiling of ₹25 crore; those between ₹1 lakh crore and ₹10 lakh crore have ₹10 crore; and banks below ₹1 lakh crore have ₹5 crore.
For NBFCs, thresholds are ₹10 crore for upper and top layers, ₹5 crore for the middle layer, and ₹1 crore for the base layer.
Loans fully secured by government securities, fixed deposits, or life insurance policies are exempt from Board approval if the loan-to-value ratio does not exceed 100%, while exposures above the materiality threshold must be sanctioned by the Board or a dedicated Committee on Lending to Related Parties.
For cooperative banks, the RBI has broadly aligned norms with existing provisions but introduced tier-based materiality thresholds for loans requiring Board approval. Loans to relatives of directors or firms and companies in which they have an interest are permitted for Tier-4 urban cooperative banks within the prescribed thresholds.
For All India Financial Institutions, existing prohibitions on lending to directors and related entities continue unchanged.
The revised guidelines, which incorporate feedback received on the draft Directions issued in October 2025, will come into effect from April 1, 2026.
Under the amended directions, equity investments in related parties are excluded from the scope of these regulations, while investments in debt instruments of related parties remain covered. The
To ensure a smooth transition, the RBI has allowed existing non-compliant related-party transactions to continue until any enhancement, renewal, re-pricing, or modification of their terms. However, such exposures cannot be renewed or reviewed unless they are fully compliant with the new rules. This approach replaces the earlier proposal of a one-year run-off period to ensure non-disruptive implementation.
The directions also introduce stricter disclosure requirements, mandating that regulated entities report the aggregate value of contracts and arrangements with related parties in their financial statements. While some stakeholders had suggested excluding contracts from disclosure, the RBI noted that contracts can be a channel for undue benefits to related parties and therefore must remain under regulatory oversight.
A key feature of the amendment is the expanded definition of related parties, aligning it with the Companies Act, 2013, and relevant provisions of the Insolvency and Bankruptcy Code (IBC).
For both banks and NBFCs, related parties now include promoters, directors, key managerial personnel and their relatives, and shareholders holding more than 10 percent of equity. The definition further extends to entities where related parties exercise significant influence or control, trust structures where related persons are trustees, authors, or beneficiaries, and introduces the concept of reciprocally related persons for banks. Professional advice or instructions provided in a professional capacity are explicitly excluded from the definition.
The RBI has also revised terminology, replacing “senior officer” with “specified employee,” defined as an employee up to two levels below the Board, providing clarity and flexibility for internal grading structures. For foreign bank branches operating in India, statutory restrictions on lending apply to directors at both the local branch and global head office levels, in accordance with Section 20(1)(b) of the Banking Regulation Act, 1949.
On exposure limits, the amended directions replace the term “substantial interest” with “significant influence and control,” reducing ambiguity and ensuring alignment with accounting standards. Non-strategic holdings by mutual funds, other banks, insurance companies, and foreign portfolio investors are specifically exempted from the restrictions, provided they do not exercise control over the bank.
For Rural Cooperative Banks, the RBI has maintained legislative intent under Section 20(1)(b), rejecting requests to exempt agricultural and allied activity loans granted to directors.
A new materiality threshold framework has been introduced to ensure proportionality. For banks, thresholds vary by asset size: banks with assets over ₹10 lakh crore have a ceiling of ₹25 crore; those between ₹1 lakh crore and ₹10 lakh crore have ₹10 crore; and banks below ₹1 lakh crore have ₹5 crore.
For NBFCs, thresholds are ₹10 crore for upper and top layers, ₹5 crore for the middle layer, and ₹1 crore for the base layer.
Loans fully secured by government securities, fixed deposits, or life insurance policies are exempt from Board approval if the loan-to-value ratio does not exceed 100%, while exposures above the materiality threshold must be sanctioned by the Board or a dedicated Committee on Lending to Related Parties.
For cooperative banks, the RBI has broadly aligned norms with existing provisions but introduced tier-based materiality thresholds for loans requiring Board approval. Loans to relatives of directors or firms and companies in which they have an interest are permitted for Tier-4 urban cooperative banks within the prescribed thresholds.
For All India Financial Institutions, existing prohibitions on lending to directors and related entities continue unchanged.
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