What changed
The amendment inserts 13 new definitions into Chapter I of the SFB Credit Risk Management Directions, 2025. Key additions include definitions for 'Committee on lending to related parties', 'Related Party', 'Reciprocally Related Person', 'Lending' (covering funded and non-funded facilities, excluding equity investments), and 'Control' as per Companies Act. These definitions align SFB norms with broader regulatory frameworks.
What it means for you
SFBs must now formally constitute a Board committee (other than Audit Committee) to sanction loans to related parties, ensuring greater oversight. The expanded definition of related parties captures a wider net of individuals and entities, including reciprocally related persons and those with control or significant voting rights. This will require SFBs to revamp their credit appraisal and monitoring processes for related party exposures, potentially increasing compliance costs but reducing conflict-of-interest risks.
What you must do
- Form a Board-level 'Committee on lending to related parties' or designate an existing committee (excluding Audit Committee) for sanctioning related party loans.
- Update internal policies and systems to incorporate the new definitions of related party, reciprocally related person, lending, and control.
- Review all existing and proposed credit facilities to related parties to ensure compliance with the amended definitions and committee approval requirements.
- Train credit and compliance teams on the expanded scope of related parties, including entities where a related person is a guarantor or has power to nominate a director.
Who it affects
Small Finance Banks, Board of Directors of SFBs, Credit risk and compliance teams at SFBs, Audit and risk committees of SFBs
What is the 'Committee on lending to related parties'?
It is a Board committee specifically tasked with sanctioning loans to related parties. SFBs can use an existing committee (other than the Audit Committee) for this purpose.
Does 'lending' include investments in related party debt?
Yes, lending covers both funded and non-funded credit facilities, including investments in debt instruments of related parties. Equity investments are excluded.
Who is a 'Reciprocally Related Person'?
An individual who is a director (excluding independent/nominee directors) of another commercial bank, AIFI, scheduled cooperative bank, or bank subsidiary; or a trustee of a mutual fund/AIF set up by such entities; or a relative of such director or trustee.