Draft RBI Directions on NBFC Lending to Related Parties – Key Highlights

 

Introduction: Why the RBI Proposed The Directions

In recent years, concerns have intensified over governance lapses and concentration of exposures within related entities in the NBFC sector. Some NBFCs have been criticised for routinely granting favorable terms to promoter-related parties or renewing limits without adequate scrutiny—raising red flags about potential conflicts of interest, insider lending, and erosion of financial soundness.

Moreover, as India’s financial architecture evolves, there is a drive to align NBFC regulatory norms with banking sector practices and draw lessons from corporate and securities regulations. The Reserve Bank of India (Non Banking Financial Company- Lending to Related Parties) Directions, 2025- Draft aims to bring similar discipline, transparency, and accountability to the non-banking lending space.

By prescribing clear boundaries, independent oversight, and mandated reporting, the RBI seeks to preempt risks of moral hazard, reduce opacity in intra-group funding, and strengthen the overall resilience and trust in NBFCs.

Key Provisions of the Draft Directions

1. Transition Window for Legacy Exposures

NBFCs may allow existing related-party loans or limits that do not yet conform to the new Directions to run off till maturity or for one year from the date of issuance (whichever is earlier). However, such facilities cannot be renewed or enhanced post-expiry unless they conform to the new rules.

This “grandfathering with sunset” approach balances stability and continuity with the need to end non-compliant arrangements.

2. Credit Policy: Aggregate & Sub-Limits

The credit policy of each NBFC must define an aggregate ceiling for all related-party lending. Within that, sub-limits must be set for exposures to a single related party and to a group of related parties.

The intent is to prevent undue concentration and ensure that exposures to related entities remain governed by the same prudential limits as for external parties.

3. Materiality Threshold for Directors / KMPs

Loans to Directors or Key Managerial Personnel (KMPs) must respect a materiality threshold of ₹1 crore. Below that, such loans may be permitted subject to further safeguards; above it, additional scrutiny would apply.

This threshold-based approach seeks to draw a balance—focusing regulatory attention where the amounts are significant, while avoiding micromanagement of small, routine advances.

4. Semi-Annual Reporting via DAKSH

NBFCs will report, on a semi-annual basis, the following via the DAKSH portal:

  • Loans sanctioned to related parties

  • Contracts awarded to related parties

  • Other arrangements made with related parties

This introduces data-driven supervision and allows the RBI to monitor evolving patterns of related-party exposures in near real time.

5. Board Committee on Related-Party Lending

Each NBFC must constitute a Board-level committee specifically responsible for oversight of lending to related parties.

Key roles of this committee will include:

  • Review and approval of related-party proposals

  • Ensuring arm’s length terms

  • Safeguarding conflict-of-interest issues

  • Periodic reporting to the full board

This institutional arrangement is intended to insulate decisions from undue influence and reinforce independent oversight.

Key Issues for Industry Consideration

While the intent is sound, NBFCs may face practical challenges in implementation:

  • Definition overlaps: The term "related party" must be harmonized with definitions under the Companies Act and Ind AS to avoid interpretational ambiguity.

  • Operational readiness: Smaller NBFCs may need time to develop reporting systems compatible with the DAKSH portal and to establish dedicated Board committees.

  • Exposure calibration: Determining aggregate and sub-limits may require granular data analytics and group-level mapping—something many mid-sized NBFCs are yet to institutionalize.

  • Existing facilities: Managing the one-year “run-off” window for legacy loans will require close tracking and prompt corrective action.

Suggestions for NBFCs

NBFCs can start preparing now, even before the Directions are finalized:

  1. Map related parties comprehensively across promoters, directors, and group entities.

  2. Review existing exposures and identify loans or guarantees that may fall outside the proposed framework.

  3. Update the credit policy to include aggregate and single-party limits, approval procedures, and arm’s length safeguards.

  4. Constitute or empower a Board-level committee to oversee related-party transactions.

  5. Develop internal MIS and reporting formats aligned with DAKSH requirements.

By adopting these measures early, NBFCs can ensure a smooth transition once the Directions are notified — and demonstrate proactive compliance culture to regulators and stakeholders alike.

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