The Reserve Bank of India (RBI) on Monday announced significant modifications to its earlier proposals concerning related party transactions for banks and non-banking financial companies (NBFCs). The central bank accepted several suggestions from industry stakeholders, providing more flexibility while maintaining regulatory oversight over lending to connected entities.
Existing Transactions Get a Reprieve
In a key relief to the financial sector, the RBI agreed to allow existing related-party transactions that do not comply with the new regulatory directions to continue until their original contractual maturity. This move came after stakeholders requested the removal of a proposed one-year run-off period for such deals.
The RBI clarified that all existing non-compliant transactions can continue until there is any enhancement, renewal, re-pricing, or alteration in their terms and conditions. This decision provides operational continuity and prevents potential disruption to ongoing financial arrangements.
Refining the Definition of a Related Party
The regulator also made crucial adjustments to its proposed nine-point definition of a 'related party'. The original definition, introduced in October, had cast a wide net. It included entities where a related person or their relative held positions such as partner, manager, director, or promoter, or was a shareholder holding more than 10% of the equity or paid-up equity capital of ₹5 crore, whichever was lower.
Responding to feedback that this scope was excessively broad, the RBI accepted two major changes. First, it removed the reference to 'relatives' of a related person from the definition of a 'related party', noting that such individuals were already covered separately as 'related persons'. Second, the central bank eliminated the ₹5 crore threshold from the criteria.
RBI Rejects Alignment with SEBI Framework
However, the banking and finance industry's request for aligning the RBI's definition of a related party with the existing framework prescribed by the Securities and Exchange Board of India (SEBI) was rejected. The RBI stated that an exact alignment with SEBI's Listing Obligations and Disclosure Requirements (LODR) was not considered appropriate.
The central bank explained that the regulatory objectives of the two frameworks are fundamentally different, justifying the need for a distinct approach tailored to the banking sector's specific risks.
Background and Regulatory Concerns
The RBI had initially proposed these changes in October, expressing concern that lending to related parties—entities connected through ownership or influence over lending decisions—could be detrimental to the bank's health and the interests of its depositors and other stakeholders. It had noted that such parties extend beyond those covered by existing statutory restrictions, making direct or indirect lending to them a persistent regulatory concern.
Monday's announcements reflect a balanced approach by the regulator, incorporating practical industry feedback while steadfastly pursuing its core objective of safeguarding financial stability and protecting stakeholder interests from the risks posed by connected lending.
