RBI asks banks to formulate credit risk management policies, which will include lending to related parties

The Reserve Bank of India (RBI) has asked commercial banks (SCBs) to formulate a Board-approved credit risk management policy, covering aspects such as related party lending, country risk management and unhedged foreign exchange exposure.

With regard to related party lending, banks must, among other things, specify aggregate limits for loans within materiality thresholds, establish a ‘Related Party Lending Committee’ and have a comprehensive whistleblowing mechanism.

As per the Reserve Bank of India (Commercial Banks – Credit Risk Management) – Amendment Directions, 2026, loans to related parties, which are permitted (including credit facilities fully secured by cash or liquid securities and in accordance with the prescribed LTV/loan-to-value and valuation norms for such securities) shall not exceed the materiality threshold ceilings.

Depending on the size of the assets, a materiality threshold ceiling (MTC) is prescribed. For a bank with an asset size of less than ₹1 lakh crore, the MTC is ₹5 crore; for a bank with an asset size greater than/equal to ₹1 lakh crore and up to ₹10 lakh crore, the MTC is ₹10 crore; and for a bank with an asset size of more than ₹10 lakh crore, the MTC is ₹25 crore.

All loans above the prescribed materiality threshold must be sanctioned by the board or by the ‘Related Party Lending Committee’ of the bank. As far as loans below the materiality threshold are concerned, the same can be sanctioned by the competent authority in the form of powers delegated to them.

Abstain from deliberations

Directors, Key Managerial Personnel (KMP) or ‘specified employees’ must refrain from deliberations and decisions on loan proposals, or contracts and arrangements, involving themselves or their related parties, according to the guidelines.

Such denial will also extend to deliberations and decisions regarding any subsequent material changes in the terms of such loans, including one-time settlements, write-offs, waivers, enforcement of securities, implementation of resolution plans, etc.

RBI said a bank should establish an appropriate mechanism for maintaining and periodically updating the list of all associated persons and their related parties and the loans extended by the bank to such associated persons and related parties.

Whistleblowing mechanism

The policy will, as part of the whistleblowing mechanism, encourage employees to communicate confidentially and without risk of retaliation about any legitimate concerns about irregular, unethical or questionable loans to related parties; and abolish any quid pro quo arrangements.

The central bank said these changes, which also cover aspects related to property valuation, including the deployment of valuers and the opening of current accounts and Cash Credit/Over Draft accounts, will come into effect from April 1, 2026. However, banks may decide to implement the changes in full from an earlier date.

Published on January 5, 2026