RBI Draft: AIFIs – Lending to Related Parties (2025)
- RBI drafts tighter rules for AIFIs on lending to related parties 0
- Board-led policy, recusal, audits, and semi-annual reporting mandated 1
- Materiality thresholds capped; violations attract penalties and restrictions 2
What is this? A draft set of directions for All India Financial Institutions (AIFIs) on lending to related parties, issued under Section 45L of the RBI Act, 1934; proposed effective date: April 1, 2026. 3
Scope & Applicability
- Applies to all lending (funded and non-fund based) and any contract/arrangement by an AIFI with a related party. 4
- Existing non-conforming related-party exposures may run off till maturity or one year from issue date (whichever earlier); no renewals/enhancements unless compliant. 5
Key Definitions (Plain English)
- Related Person/Party: Includes promoters, directors, KMPs, major shareholders (≥5% in AIFI), entities where such persons hold roles/ownership/control, voting agreements, nominees, guarantors, specified private trusts, group entities, etc. (Govt.-owned entities aren’t “related” solely due to common government ownership). 6
- Committee on lending to related parties: Board-created committee to handle such proposals. 7
Board Policy & Governance
- Board must frame a dedicated credit policy section for related-party lending with extra safeguards, whistleblowing, and a ban on quid pro quo. 8
- Set aggregate/sub-limits for single/group related parties within RBI exposure norms. 9
- Specific provisions for loans to senior officers and their relatives. 10
Materiality Thresholds (Ceilings)
| AIFI Asset Size (₹ crore) | Max Materiality Threshold |
|---|---|
| > 10,00,000 | ₹50 crore |
| ≥ 1,00,000 to ≤ 10,00,000 | ₹10 crore |
| < 1,00,000 | ₹5 crore |
Notes: excludes certain secured loans to directors/KMP (e.g., against govt. securities, LIC policies, FDs) and employee-eligible personal loans to employee-directors (subject to prudential/LTV norms). Sanctions above threshold need Board/Committee approval. 11
Recusal & Conflict Management
- Directors/KMP with direct/indirect interest must recuse from sanction, disbursal, OTS, write-offs, enforcement, or resolution decisions involving related parties. 12
Monitoring, Audits & Declarations
- Maintain and periodically update a list of related parties; internal audit reviews at least quarterly. Deviations go to Audit Committee. 13
- Structures that try to circumvent rules (e.g., reciprocal lending/quid pro quo) will still be treated as related-party lending. 14
- Statutory auditors must test samples; all exposures to group entities must be examined. Annual declarations of loans by Directors/KMP & associated entities required. 15
Supervisory Reporting & Public Disclosures
- Semi-annual reporting to RBI via DAKSH: details of loans/contracts with related parties (format in Appendix 1) and any non-compliance. 16
- Financial statement notes must disclose (last two years): total outstanding to related parties; share of total exposure; SMA/NPA split & provisions; top 10 related-party exposures (including NFB facilities, investments, positive MTM of derivatives, contracts/arrangements). 17
Penalties for Non-Compliance
What RBI can do: Monetary penalties, require full provisioning, staff accountability exercises, forensic audits, restrictions, and other supervisory/enforcement actions. 18
Repeal of Earlier Circular
On issuance, the 2002 circular “Connected Lending by the select All-India Financial Institutions (FIs)” will be repealed (DBS.FID No.C-10/01.02.00/2002-03, Dec 21, 2002). 19
What Will Happen (Implications for AIFIs & Market)
- Tighter governance & fewer conflicts: Board oversight, recusals, and auditor scrutiny will reduce connected lending risks. 20
- Stricter screening of promoter/group exposures: Threshold caps and disclosure of top exposures will curb concentration and opacity. 21
- Data transparency: Semi-annual DAKSH filings + public note disclosures improve supervisory visibility and investor confidence. 22
- Legacy clean-up window: One-year run-off for non-compliant legacy exposures—no rollovers/enhancements unless aligned with the new norms. 23
- Enforcement risk rises: Non-compliance can trigger penalties, provisioning hits, and restrictions, impacting capital & profitability if ignored. 24
Source: RBI draft “Reserve Bank of India (All India Financial Institutions – Lending to Related Parties) Directions, 2025.” Effective April 1, 2026 (proposed). 25
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