The updated guidelines, which reflect the feedback received on the draft Directions released in October 2025, will take effect from April 1, 2026.
According to the amended directions, equity investments in related parties are excluded from these regulations, while investments in their debt instruments remain under scrutiny. The RBI has also exempted
specific categories of NBFCs—specifically those that do not engage with public funds or customers—as well as Core Investment Companies (CICs) focused on lending to group firms, from these directives.
To facilitate a smooth transition, the RBI permits existing non-compliant related-party transactions to persist until any enhancement, renewal, re-pricing, or modification of their terms. However, such exposures cannot be renewed or reviewed unless they comply fully with the new regulations. This replaces the prior proposal of a one-year runoff period to ensure non-disruptive implementation.
The directions also introduce more stringent disclosure requirements, compelling regulated entities to report the total value of contracts and arrangements with related parties in their financial statements. While some stakeholders suggested excluding contracts from disclosures, the RBI determined that contracts could facilitate undue benefits to related parties and must therefore remain under regulatory scrutiny.
A significant aspect of the amendment is the broadened definition of related parties, aligning it with the Companies Act, 2013, and relevant sections of the Insolvency and Bankruptcy Code (IBC).
For both banks and NBFCs, related parties now encompass promoters, directors, key managerial personnel and their relatives, as well as shareholders owning more than 10 percent of equity. The definition also includes entities where related parties have significant influence or control, trust structures where related individuals serve as trustees, authors, or beneficiaries, and adds the concept of reciprocally related individuals for banks. Professional advice or instructions given in a professional capacity are specifically excluded from this definition.
The RBI has updated terminology, replacing “senior officer” with “specified employee,” defined as any employee up to two levels below the Board, offering clarity and flexibility for internal grading structures. For foreign bank branches operating within India, statutory restrictions on lending apply to directors at both local branch and global head office levels, pursuant to Section 20(1)(b) of the Banking Regulation Act, 1949.
On exposure limits, the amended directives substitute “substantial interest” with “significant influence and control,” minimizing ambiguity and ensuring alignment with accounting standards. Non-strategic holdings by mutual funds, other banks, insurance firms, and foreign portfolio investors are explicitly exempted from these restrictions, provided they do not exert control over the bank.
For Rural Cooperative Banks, the RBI has upheld legislative intent under Section 20(1)(b), dismissing requests to exempt loans related to agricultural and allied activities granted to directors.
A new materiality threshold framework has been established to ensure proportionality. For banks, thresholds vary according to asset size: banks with assets exceeding ₹10 lakh crore have a limit of ₹25 crore; those between ₹1 lakh crore and ₹10 lakh crore have a threshold of ₹10 crore; and banks below ₹1 lakh crore are capped at ₹5 crore.
For NBFCs, thresholds are set at ₹10 crore for upper and top tiers, ₹5 crore for the middle tier, and ₹1 crore for the base tier.
Loans fully secured by government securities, fixed deposits, or life insurance policies are exempt from needing Board approval if the loan-to-value ratio does not surpass 100%, while exposures exceeding the materiality threshold must be approved by the Board or a dedicated Committee on Lending to Related Parties.
For cooperative banks, the RBI has generally aligned its norms with existing provisions but introduced tier-based materiality thresholds for loans necessitating Board approval. Loans to relatives of directors or firms and companies in which they have an interest are allowable for Tier-4 urban cooperative banks within the set thresholds.
For All India Financial Institutions, the existing prohibitions on lending to directors and related entities remain unchanged.
