RBI Draft Interest Rate Directions 2026: Is RBI Tightening NBFC Group Company Lending?

 

-            Reading the RBI's proposed interest-rate framework beyond the headline

The Reserve Bank of India’s proposed Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 may, at first glance, appear to be a technical exercise in consolidating the rules governing interest-rate determination.

But a closer reading raises a broader regulatory question: Is RBI gradually moving towards a framework where an NBFC is expected to demonstrate genuine credit intermediation and risk-based lending, rather than merely functioning as a financing vehicle for its own group or promoter entities?

The answer is not yet an outright “yes” in terms of a prohibition. The Draft Directions do not say that NBFCs cannot lend to subsidiaries, group companies or promoter entities. However, several elements of the proposed framework, when read together with RBI's existing regulatory architecture, point towards a stronger emphasis on substance, credit risk, arm's-length pricing and genuine lending activity.

1. The starting point: an NBFC is supposed to be in the business of lending:

An NBFC is fundamentally a financial intermediary whose principal business involves activities such as loans and advances and other specified financial activities.

RBI's regulatory framework therefore distinguishes between an entity that is genuinely carrying on financial business and an entity whose financial activities are merely incidental to its principal business.

This distinction becomes particularly important where an NBFC belongs to a corporate group.

The NBFC may technically be granting a loan. But if substantially all of its lending is to its own group entities, the question arises:

Is the NBFC actually performing financial intermediation, or is it simply a regulated financing arm of the group?

That is where the proposed interest-rate framework becomes interesting.

2. RBI's proposed pricing architecture is based on actual credit risk:

The Draft Directions provide that interest on both fixed-rate and floating-rate loans is to be determined with reference to: Benchmark + Risk-based Spread

An RE cannot price a loan below the applicable benchmark.

More importantly, the proposed framework requires the spread to contain a Credit Risk Premium (CRP), and RBI expressly states that the CRP:

• must be positive;
• should represent the credit risk associated with the borrower and credit facility;
• should be arrived at using an appropriate credit-risk rating/scoring methodology; and
• should consider factors such as probability of default, expected losses, collateral and other risk mitigants.

The proposed framework does not contemplate interest pricing as an arbitrary number chosen by the lender.

It requires a demonstrable connection between: Borrower → Credit risk → Risk assessment → Risk premium → Interest rate.

3. Why does this matter for group-company lending?

Suppose an NBFC lends ₹100 crore to its promoter's operating company.

If the transaction is genuinely a loan, the NBFC should be able to demonstrate:

• why the borrower requires the funds;
• what the funds will be used for;
• the borrower's repayment capacity;
• the probability of default;
• the security/collateral, if any;
• the appropriate credit rating/scoring;
• the applicable risk premium;
• the benchmark;
• the spread; and
• why the final interest rate is commercially justified.

The fact that the borrower happens to be a group company should not make these questions disappear.

In fact, the existence of a group relationship makes arm's-length credit assessment even more important.

This is because a group-company loan can potentially involve conflicts of interest, preferential pricing, weak underwriting or financing decisions driven by group requirements rather than independent credit considerations.

The Draft Directions therefore create a framework in which the economic substance of the lending decision becomes more visible.

4. The CRP cannot simply be zero:

One of the more interesting provisions is paragraph 22.

The Draft Directions permit components of the spread to be positive or zero; But Credit Risk Premium must be positive.

Further, CRP can be revised only when the borrower's credit profile changes and after a comprehensive review of the borrower's credit risk profile.

This potentially has important implications for intra-group lending.

An NBFC cannot simply argue that because the borrower is a group company, the credit risk is effectively negligible and therefore no credit-risk premium is necessary.

The proposed framework appears to require an identifiable credit-risk component in the pricing.

That is a meaningful regulatory signal.

5. “Business strategy premium” does not mean arbitrary group pricing:

The Draft Directions permit the spread to contain components such as Credit Risk Premium, Operating Cost, Term Premium and Business Strategy Premium.

Business strategy premium may take into account competition, liquidity, expected returns and other commercial considerations; This provides commercial flexibility.

But that flexibility exists within a documented Board-approved methodology.

The NBFC must define loan categories, spread components, methodology for determining each component and the range of spreads for different loan categories.

The policy must be approved by the Board and reviewed at least annually.

Therefore, a group-company loan cannot simply be priced at an unexplained rate because the borrower belongs to the promoter group; The NBFC should be able to demonstrate that the pricing falls within its approved framework.

6. The proposed framework therefore asks a fundamental question: “Why this rate?”

This is perhaps the most important conceptual shift.

Historically, the regulatory focus on interest rates has largely been about preventing excessive interest and ensuring transparency to borrowers; The proposed framework goes further into the architecture of pricing.

It effectively requires the lender to be able to answer: Why is this borrower being charged this rate?

And the answer should flow from: Benchmark + risk + cost + tenor + documented commercial considerations.

That is particularly relevant where the borrower and lender are under common ownership.

7. But does this mean group-company lending is prohibited?

No. The Draft Interest Rate Directions do not contain a blanket prohibition on an NBFC lending to its subsidiary, another group company, promoter-related entities or other related parties.

Therefore, it would be incorrect to conclude that RBI has, through these Draft Directions, prohibited intra-group lending.

Existing RBI regulations continue to govern such transactions through applicable exposure, related-party, connected-lending, concentration and other prudential requirements.

Indeed, RBI's regulatory framework has historically recognised the existence of NBFC group structures and specifically aggregates assets of NBFCs belonging to a common group/ common promoter for certain regulatory purposes.

The regulatory issue is therefore not simply “group company = prohibited borrower.”

The issue is increasingly: “Is the lending transaction independently justifiable, properly priced, prudentially permissible and consistent with the NBFC's regulated financial business?”

8. There is already a regulatory history behind this concern:

This is not an entirely new regulatory theme; RBI has historically imposed restrictions on financing activities involving NBFCs, including restrictions applicable to banks/AIFIs financing certain activities undertaken by NBFCs. For example, RBI's framework has restricted bank finance to NBFCs for certain activities, including investments in and advances to subsidiaries/group companies and inter-corporate loans/deposits.

These restrictions are important because they demonstrate a longstanding regulatory concern: regulated financial-sector funding should not be used merely as a channel for leveraged intra-group transactions or other activities that RBI considers inconsistent with prudent credit intermediation.

The current proposals can therefore be viewed as part of a broader evolution rather than an isolated development.

9. From “can the NBFC lend?” to “why is the NBFC lending?”

This may ultimately be the more important regulatory question.

For an NBFC whose loan book consists predominantly of unrelated third-party borrowers, the credit-risk architecture proposed by RBI is relatively straightforward.

But consider an NBFC where:

• 80–90% of its loan book consists of group-company loans;
• the borrowers are controlled by the same promoter;
• the loans are repeatedly renewed;
• pricing is not demonstrably linked to borrower risk;
• repayment is dependent upon group-level cash flows; and
• the NBFC has limited independent credit underwriting.

The transaction may still need to be examined under the specific applicable regulatory provisions, and the proposed interest-rate framework makes it increasingly difficult to treat pricing as merely an internal group decision.

The NBFC should be able to demonstrate real credit analysis and risk-based pricing.

10. A particularly important provision- “internal benchmark”:

For REs other than those for which MCLR is prescribed, the Draft Directions permit an internal benchmark derived from the RE's marginal cost of funds, based on a methodology documented in its policy.

The methodology must also be made publicly available.

For an NBFC, this creates an important governance trail: Cost of funds → Internal benchmark → Risk premium → Spread → Lending rate.

This makes it easier for the regulator to assess whether the NBFC's loan pricing methodology is being applied consistently.

11. The regulatory direction appears to be “substance over form”:

Taken together, the developments suggest a broader RBI philosophy:

Not merely: “Is this company registered as an NBFC?”

But increasingly: “Is the entity actually functioning as a prudent financial intermediary in substance?”

And not merely: “Has a loan agreement been executed?”

But: “Was there genuine credit appraisal, risk assessment, appropriate pricing and repayment capacity analysis?”

This distinction may become increasingly important for promoter/group-company lending.

12. What should NBFCs with significant group-company exposure do?

NBFCs with substantial intra-group lending should consider conducting a “genuine lending” review covering:

A. Borrower-level credit appraisal: Can the NBFC demonstrate an independent assessment of cash flows, repayment capacity, leverage, creditworthiness, security, probability of default and expected loss?

B. Pricing: Can the NBFC demonstrate: Benchmark + CRP + other spread components = final lending rate?

C. Arm's-length rationale: Would the NBFC have sanctioned substantially similar financing to an unrelated borrower having a comparable credit profile?

D. Documentation: Do the loan documents adequately record purpose, tenor, interest rate, benchmark, security, repayment schedule, default provisions and reset mechanism?

E. Concentration: What percentage of the NBFC's total exposure is to promoter entities, subsidiaries, associates, group companies and related parties?

F. Business model: If the overwhelming majority of the NBFC's assets consist of loans to group entities, is there a clear commercial rationale for the structure?

This last question may be particularly relevant from a supervisory perspective even where the individual transactions are technically within the applicable limits.

13. A caveat: this should not be overstated:

There is an important limitation to this analysis; The Draft Interest Rate Directions do not expressly state that NBFCs must lend only to “genuine external borrowers.”

RBI appears to be strengthening the regulatory expectation that lending by an NBFC should be supported by genuine credit assessment, risk-based pricing and a demonstrable commercial rationale. This could have significant implications for NBFCs whose business model relies heavily on intra-group or promoter-related financing.

Note: This article reflects an analytical interpretation of the Draft Directions and should not be construed as stating that RBI has prohibited intra-group lending. The final regulatory position may differ from the draft.