The Reserve Bank of India has announced comprehensive changes to credit risk management rules for commercial banks, introducing stricter controls on related-party lending and enhanced governance frameworks. The new regulations, which take effect on April 1, 2026, represent a significant overhaul of existing lending practices and aim to strengthen the banking sector's risk management capabilities.

Key Prohibitions and Restrictions

The revised norms establish clear prohibitions on lending to specific categories of related parties. Banks are now barred from providing loans to their promoters, relatives of promoters, and shareholders holding 10% or more equity stake. The restrictions also extend to entities controlled or influenced by these parties, with exceptions only for non-strategic institutional holdings without control rights.

Governance and Approval Framework

The new regulations mandate banks to implement robust governance structures for managing related-party transactions. All banks must adopt board-approved policies covering lending to related parties and establish aggregate and sub-limits for such exposures. The framework includes mandatory recusal requirements for directors, key managerial personnel, and specified employees from decisions involving their own interests or those of related parties.

Loan approval thresholds are structured based on bank size, ensuring appropriate oversight for material transactions:

Monitoring and Compliance Requirements

Banks must establish comprehensive monitoring mechanisms to ensure ongoing compliance with the new regulations. Key requirements include maintaining updated lists of related parties, conducting quarterly compliance reviews, and reporting any deviations to audit committees. Annual disclosure of loans to specified employees is also mandatory under the new framework.

The regulations incorporate whistleblower mechanisms to flag irregular or unethical loans, strengthening internal controls and promoting transparency in lending decisions. Listed banks face additional compliance obligations under capital markets regulator SEBI's disclosure rules and RBI's intra-group exposure limits.

Treatment of Existing Transactions

The RBI has provided clarity on the treatment of existing related-party transactions that may not comply with the revised norms. These transactions can continue until maturity but face restrictions on renewal, repricing, or enhancement unless they meet the new requirements. The central bank stated that existing non-compliant transactions are permitted to continue until there is any enhancement, renewal, re-pricing, or change in terms and conditions.

Scope and Definitions

The regulator has modified the definition of related parties, removing the previous ₹5.00 crore monetary threshold for shareholding considerations. Nominee directors of other banks appointed by statutory bodies are excluded from related-party definitions, while restrictions remain on RBI's own nominee and independent directors. Notably, equity investments fall outside the scope of these new directions, though investments in debt instruments of related parties remain covered.

Enforcement and Penalties

Non-compliance with the new regulations will attract significant enforcement actions from the RBI. Potential penalties include monetary sanctions, additional provisioning requirements, forensic audits, and business restrictions. The central bank has emphasized that circumvention attempts will also face similar enforcement measures, underscoring the seriousness of compliance expectations.

Reserve Bank of India Governor Sanjay Malhotra urged non-banking financial companies (NBFCs) and housing finance companies (HFCs) to strengthen underwriting standards and uphold customer-centric practices during a high-level meeting in Mumbai. The Governor emphasized that these measures are essential to ensure sustainable growth and maintain confidence in the sector.

Meeting Details and Participation

The meeting brought together managing directors and chief executive officers from select NBFCs, government NBFCs, housing finance companies, and microfinance institutions. This gathering marked the first such interaction with NBFCs since February, highlighting the importance of regular stakeholder engagement.

Key Areas of Focus

During the interactive session, Governor Malhotra highlighted several crucial aspects for the sector's sustainable development:

Industry Representation and Engagement

The meeting achieved significant industry representation, with participants accounting for approximately 53% of NBFC sector assets. Key attendees included representatives from self-regulatory organizations such as Sa-Dhan, the Micro Finance Institutions Network, and the Finance Industry Development Council.

Senior RBI officials led by Deputy Governors T. Rabi Sankar, Swaminathan J, Poonam Gupta, and SC Murmu participated alongside the MD & CEO of the National Housing Bank, ensuring comprehensive regulatory oversight and guidance.

Strategic Implications

The Governor's emphasis on strengthening underwriting standards reflects the central bank's commitment to maintaining financial stability while supporting economic growth through adequate credit flow. The focus on customer-centric practices aligns with broader regulatory objectives of ensuring that NBFCs and HFCs continue their vital role in credit intermediation while maintaining high standards of governance and risk management.

This engagement underscores the RBI's proactive approach to sector supervision and its commitment to fostering sustainable growth in the non-banking financial sector through regular dialogue with key stakeholders.