By V Shunmugam
Earlier this month, the Reserve Bank of India tightened the related party lending norms for banks. This shifts oversight from the bank management to the board, ensuring insider lending decisions are formally reviewed, documented & held accountable at the highest level, explains V Shunmugam
How is a related party defined
In corporate law, the related party concept is rooted in the Companies Act, 2013. It outlines relationships based on control, significant influence, shared directorships, key managerial personnel (KMP), relatives, and entities like subsidiaries, associates, and joint ventures. The goal is to recognise situations where transactions might not be conducted at arm’s length.
The Securities and Exchange Board of India’s (Sebi) listing obligations and disclosure regulations (LODR) expand the scope for listed companies by covering not only control and influence but also material related party transactions (RPTs) that may impact minority shareholders. The regulations prioritise transparency, shareholder approval, and disclosure.
However, the Reserve Bank of India (RBI) views related-party lending differently.
For banks, it’s not just about governance but also a prudential risk. Lending to promoters, directors, senior management, or connected entities directly impacts credit assessment integrity, moral hazard, and systemic risk. Therefore, the January 2026 related party lending amendments establish a bank-specific, risk-based definition of related parties focused on credit exposure.
Why does related party lending matter more for banks?
For banks, related party lending intersects with compliance, risk manage-ment, and board oversight. Unlike non-financial companies, a bank’s balance sheet mainly consists of leveraged public deposits. Any bias in credit allocation—particularly to insiders—can harm asset quality and reduce financial stability.
The recent directions mark a move away from the scattered restrictions under Section 20 of the Banking Regulation Act towards a unified, policy-based frame-work that oversees related party lending and monitoring disclosure.
The changes: Expand and standardise the definition of related parties for banks; introduce explicit board-level responsibility and dedicated committees; mandate granular disclosures in financial statements and tighten audit, recusal and enforcement.
What is a specified employee
A key innovation is the introduction of ‘specified employees’. They are those within two levels below the board, along with others designated by bank policy. Lending to them and their relatives must be explicitly governed by policy, reported to the board each year, and subject to audit review.
What the new rules say
RBI mandates that banks incorporate controls for related party lending into their board-approved credit risk mana-gement policy. This must cover lending to related parties, lending to specified employees and their relatives, aggregate and sub-limits, approval authorities and whistleblower safeguards. Related party lending interfaces with board-level lending or related party committees, audit committee oversight, internal audit and vigilance frameworks.
The new framework replaces discretionary bank decisions with strict regulatory limits based on balance-sheet size. Banks with assets over Rs 10 lakh crore can’t consider any related-party exposure above Rs 25 crore as immaterial; other banks have lower thresholds. Importantly, materiality now applies to individual transactions rather than the total sum.
Any exposure exceeding these limits must be approved by the board or a designated board committee. This change shifts oversight from management to the board, ensuring insider lending decisions are formally reviewed, documented, and held accountable at the highest level.
Recusal & review
Directors, KMPs and designated employees are required to recuse themselves not only from initial sanction decisions but also from any important later changes, including restructuring, waivers, or write-offs. Internal audit functions must review related party lending at least quarterly or more often.
Any policy deviations should be reported to the audit committee. RBI has also explicitly cautioned against schemes intended to bypass these rules, such as reciprocal or quid pro quo lending arrangements.
How RBI looks at RPTs versus Sebi
SEBI’S RPT regime is shareholder-centric, focusing on fairness, approvals, and disclosures for listed entities. RBI’s regime is prudential and supervisory, focusing on credit risk, the integrity of governance, and financial stability.
Importantly, RBI has clarified that listed banks are required to adhere to both frameworks—RBI for credit risk and Sebi for market disclosures—viewing the regimes as complementary rather than substitutive.
The new disclosure norms make insider lending risks transparent and comparable. These disclosures can act as an early alarm, highlighting governance issues before they lead to large NPAs or regulatory intervention. Over time, banks with low, well-managed related-party exposures are likely to be valued higher, while opaque or risky insider lending will attract higher risk discounts.
The writer is partner, MCQube