RBI Cracks Down on Related-Party Loans, Demands Board Approval

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AuthorAarav Shah|Published at:
RBI Cracks Down on Related-Party Loans, Demands Board Approval
Overview

The Reserve Bank of India has tightened rules on loans to related parties, introducing transaction-level materiality thresholds. Banks must now secure board or committee approval for loans exceeding set limits, based on balance sheet size. These measures aim to bolster credit risk management and transparency within the banking sector.

RBI Overhauls Related-Party Lending Oversight

The Reserve Bank of India (RBI) has intensified its scrutiny of loans extended to related parties, implementing new transaction-level materiality thresholds. Under the Reserve Bank of India (Commercial Banks – Credit Risk Management) Amendment Directions, 2026, loans surpassing these new limits will necessitate formal approval from a bank's board of directors or a designated committee.

New Lending Framework Established

This regulatory update specifies that loans to related parties, provided they are not already prohibited by law or existing RBI directives, will be governed by materiality thresholds. These thresholds are directly linked to the size of a bank's balance sheet, applying to each individual transaction.

Thresholds Based on Bank Size

For the nation's largest banks, those with assets exceeding ₹10 trillion, the materiality ceiling is set at ₹25 crore. Banks operating with assets between ₹1 trillion and ₹10 trillion will face a ₹10 crore ceiling. Smaller institutions with assets below ₹1 trillion will have a ₹5 crore cap. The asset size determination will rely on the most recent audited balance sheet.

Exclusions and Approval Process

Certain credit facilities are excluded from these new norms. These include credit fully secured by cash or liquid securities, provided they adhere to prescribed loan-to-value and valuation standards, as well as interbank loans. While banks retain the discretion to set varied thresholds within their internal policies, any loan breaching the regulatory cap must gain sanction from the board or the Committee on Lending to Related Parties. Lower-value loans may be approved by delegated authorities.

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