RBI Draft Lending to Related Parties Directions 2025: Key Takeaways for NBFCs

Overview

On October 1, 2025, the Reserve Bank of India released the draft "Non-Banking Financial Companies - Lending to Related Parties Directions, 2025," inviting stakeholder comments until October 31, 2025, with proposed applicability from April 1, 2026. This draft introduces a unified, principle-based framework governing lending, contracts, and financial arrangements with related parties across regulated entities-including banks, NBFCs, Housing Finance Companies (HFCs), and All India Financial Institutions (AIFIs). Its goal is to strengthen governance, transparency, and group-level discipline in India's credit markets.

Affluence Perspective: Why This Matters

The draft signals a fundamental shift from prescriptive restrictions toward a governance-driven, disclosure-oriented regime. For NBFCs-especially those operating within conglomerates or promoter-led groups-the framework seeks to:

• Reduce opacity in intra-group and promoter-linked exposures.
• Mitigate conflicts of interest via arm's-length evaluation and mandatory recusal processes.
• Align NBFC governance with the listed entity and SEBI-style related-party transaction norms.
• Complement concurrent RBI prudential reforms on co-lending, capital market exposure, and risk-weight calibration.

These directions represent more than regulatory additions; they mark a cultural transformation in how NBFC boards evaluate credit proposals involving insiders, promoters, or related entities.

Core Provisions Relevant to NBFCs

Scope and Applicability

The framework applies broadly to all NBFC categories, including HFCs. The definition of "related party" is significantly expanded to include:

• Promoters and significant shareholders (holding over 5% stake).
• Key Managerial Personnel (KMPs) and their relatives.
• Group entities, trusts, and associated enterprises.
• Persons with control or significant influence, even without direct ownership.

Both fund-based and non-fund-based exposures fall within the scope, closing gaps in earlier regulations

Materiality Thresholds and Approval Architecture

To ensure proportional governance oversight, the RBI proposes tiered approval thresholds for related-party exposures:

Transactions exceeding these limits require approval from the Board or a designated committee. Interested directors and KMPs must recuse themselves from related discussions and voting. Annual self-declarations of borrowings and guarantees by directors and KMPs are also mandatory.

Policy, Process, and Arm's-Length Controls

NBFCs must implement a board-approved Related-Party Lending Policy integrated with their credit framework. The policy should comprehensively address:

• Approval workflows and recusal procedures.
• Pricing and benchmarking standards to ensure fair and arm's-length terms.
• Monitoring triggers and aggregate/sub-limit management.
• Whistleblower protections for conflict reporting.
• Prohibition of quid-pro-quo or reciprocal arrangements.

Audits, Monitoring, and Disclosures

Related-party exposures will be subject to quarterly internal audits. Statutory auditors must conduct sample examinations of all related-party loans. A continuously updated related-party register must be maintained. Semi-annual disclosures to RBI through the DAKSH portal will include:

• New sanctions, renewals, and repayments.
• NPAs, SMA accounts, and significant exposures.
• Any breaches or exceptions.

Financial statements are required to disclose granular details on related-party exposures and provisioning.

Expanded Definitions

The draft harmonizes definitions of "related party" and "related person," drawing from the Companies Act 2013, Indian Accounting Standards (Ind AS) 24, and Basel governance principles. This includes:

• Strategic investors or board-nominee shareholders with more than 5% holding.
• Special Purpose Vehicles (SPVs) or trusts controlled by promoters.
• Indirect influence structures ensuring transparency of beneficial ownership.

Impact on Conglomerate NBFCs

Action Checklist for NBFCs

• Update and maintain comprehensive related-party registers, capturing direct and indirect linkages, trusts, and cross-holdings.
• Revise lending policies to codify approval thresholds, workflows, and mandatory recusal procedures.
• Constitute or re-mandate board-level committees responsible for related-party lending oversight.
• Strengthen documentation, including pricing benchmarks, collateral valuations, and conflict of interest declarations.
• Align internal and statutory audit scopes to include related-party exposures and prepare supervisory return templates.
• Develop readiness plans for FY 2026, including systems adaptation, staff training, and dry runs for disclosure submissions.

Consultation and Implementation Timeline

Regulatory Context

These directions align with Basel and IFRS governance standards and coordinate with RBI's 2025 prudential reforms:

• Co-lending frameworks (August 2025)
• Capital-market exposure limits (October 2025)
• Infrastructure asset risk-weight calibrations

Collectively, these reforms mark a shift toward consistent prudential treatment of group-linked credit risk across banks and NBFCs, enhancing financial system stability.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.