Lenders Law

India’s lending regulation is founded on a deliberate legal distinction:  the law regulates the “business of lending”, not every instance of lending . Accordingly: The Reserve Bank of India (RBI) regulates lending by Non-Banking Financial Companies (NBFCs) . State Governments regulate moneylenders under local Money Lending Acts. Yet, a significant and increasingly common practice now sits between these two regimes: Loans are advanced not by the NBFC, but by an individual promoter or by other group entities in which the promoter has a stake—often to borrowers who originally approached the NBFC itself. Such lending falls outside RBI regulation and outside State moneylender laws , creating a regulatory grey zone. Why RBI Regulation Does Not Extend to Individuals and Certain Group Entities? RBI’s powers under the RBI Act, 1934 extend only to entities carrying on the business of a non-banking financial institution . The 50–50 Test for NBFCs- An entity qualifies as an NBFC on...

  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 opac...