RBI Grade BNABARD ESISEBI
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Context:
“RBI MPC Unpacked: Key Theory Meets Today’s Macro Trends”Tap to play · from the C4S channel
The Reserve Bank of India (RBI) has issued final guidelines on lending to related parties, easing several provisions from the draft norms and providing significant regulatory relief to banks and other regulated entities (REs).
What is the decision?
RBI has allowed existing related-party transactions that do not comply with the new norms to continue till their contractual maturity, subject to strict conditions. This move reduces disruption and avoids forced unwinding of legacy exposures.
Key Relief Measures
1. Run-off of Existing Exposures
- Non-compliant related-party loans can continue till maturity
- No enhancement, renewal, repricing, or change in terms allowed
- Replaces the earlier proposal of a one-year run-off, offering greater operational flexibility
2. Scope Rationalisation
- Equity investments in related parties excluded from the framework
- Debt investments in related parties continue to be covered
3. NBFC Exemptions
- Certain NBFCs exempted, including:
- NBFCs not accessing public funds
- Core Investment Companies (CICs)
Definition Changes for Clarity
- ‘Senior officer’ replaced with ‘specified employee’
- Defined as employees placed up to two levels below the board
- Scope of ‘related party’ narrowed
- Removal of duplicative references to relatives
- ₹5 crore shareholding threshold eliminated
- RBI rejected calls to raise materiality thresholds
- Adopted a scale-based framework: larger REs face proportionately tighter limits
Other Important Changes
Cooperative Banks
- Scale-based approach introduced
- Tier-4 Urban Cooperative Banks allowed limited related-party lending with board approval
All India Financial Institutions (AIFIs)
- Existing prohibitions on lending to directors and interested entities continue unchanged
Board Approval Exemptions
- Related-party loans fully secured by:
- Government securities
- Fixed deposits
- Life insurance policies
- Condition: Loan-to-Value ≤ 100% of realisable value
- Such loans do not require board approval
