The Reserve Bank of India (RBI) on Monday issued the final guidelines on lending to related parties, easing several provisions from the draft norms, including allowing existing non-compliant transactions to continue till maturity. The draft guidelines were released on October 3. The aim was to provide a harmonised, principle-based framework to be adopted by regulated entities for lending to related parties and suitably rationalising the existing provisions.
Under the revised framework, equity investments in related parties have been excluded from the scope of the directions, though investments in debt instruments will continue to be covered. The RBI has also exempted certain non-banking financial companies (NBFCs), including those that do not access public funds and core investment companies, from the applicability of the norms.
In a key relief, the central bank has permitted existing related-party transactions that are non-compliant with the new rules to continue until contractual maturity, provided there is no enhancement, renewal, repricing or change in terms. This replaces the earlier proposal of a one-year run-off period, reducing implementation-related disruption for regulated entities.
RBI updates definitions
The RBI has also streamlined definitions to improve clarity. The term ‘senior officer’ has been replaced with ‘specified employee’, defined as those placed up to two levels below the board. The scope of ‘related party’ has been narrowed by removing duplicative references to relatives, while the Rs 5 crore shareholding threshold has been eliminated. At the same time, the central bank rejected demands to raise materiality thresholds, opting instead for a scale-based framework under which larger regulated entities are subject to proportionately higher limits.
What other changes have been instiuted?
Other changes include a scale-based approach for cooperative banks, with differential materiality thresholds and limited permissions for Tier-4 urban cooperative banks to extend certain related-party loans with board approval. For All India Financial Institutions, existing regulatory prohibitions on lending to directors and entities in which they have an interest will continue unchanged.
In addition, related-party loans that are fully secured by government securities, fixed deposits or life insurance policies—where the loan-to-value ratio does not exceed 100% of the realisable value—have been exempted from the requirement of board approval.