What changed
RBI inserted new definitions in Chapter I of the Credit Risk Management Directions, including 'Committee on lending to related parties', 'Related Party', 'Reciprocally Related Person', and 'Lending' (covering funded and non-funded credit, excluding equity investments). These definitions align with the Companies Act, 2013 and IBC, 2016, and expand the scope of related party transactions.
What it means for you
Banks must now formally identify and monitor related party lending through a board committee, excluding the audit committee. The broader definition of related parties (including entities controlled by directors or KMPs) increases compliance burden and requires tighter credit risk controls. This may impact loan sanctioning processes and exposure limits.
What you must do
- Form a dedicated board committee for sanctioning loans to related parties, or designate an existing committee (excluding audit committee).
- Update internal policies to align with the new definitions of related party, reciprocally related person, and lending (including debt instruments).
- Review and revise credit risk management systems to capture and monitor related party exposures as per amended directions.
- Train credit and compliance teams on the expanded scope of related parties and reporting requirements.
Who it affects
Commercial banks
What is the 'Committee on lending to related parties'?
It is a board committee responsible for sanctioning loans to related parties. Banks can use an existing committee, but not the audit committee.
Does 'lending' include equity investments in related parties?
No, lending covers funded and non-funded credit facilities and debt instruments, but equity investments are excluded.
Who is a 'Reciprocally Related Person'?
An individual who is a director (excluding independent/nominee directors appointed by government/RBI) of another commercial bank, AIFI, or scheduled cooperative bank, or a trustee of a mutual fund/alternate investment fund, or a relative of such persons.