What RBI's Draft Lending To Related Parties Directions Mean For Next-Gen Governance In NBFCs

The Reserve Bank of India (“RBI”) has released its Draft Directions on Lending to Related Parties for Non-Banking Financial Companies (NBFCs), 2025, inviting public feedback by October 31^st, 2025. These proposed norms aim to tighten oversight, eliminate regulatory arbitrage, and bring India's NBFC sector closer to global standards of transparency and accountability. For banking and financial services industries, this is more than a compliance update, it's a strategic inflection point. If adopted, the framework will require boards to rethink lending policies, enforce stricter recusal protocols, and disclose related-party exposures with unprecedented clarity.

What happens when governance becomes personal?

With directors, senior officers, and significant shareholders under the lens, the Draft Directions signal a shift from procedural compliance to ethical leadership. CXOs will need to ask: Are our internal controls strong enough? Is our board prepared to manage conflicts of interest transparently? As the industry weighs in before the October 31st deadline, the implications are clear once implemented, these directions could redefine how NBFCs manage risk, reputation, and relationships.

The Rationale: Confronting the Legacy of Connected Lending

At the core of the RBI's initiative is the age-old risk of conflict of interest and moral hazard that haunts related-party transactions. When lending decisions are influenced by internal connections, rather than prudent credit assessment, the ramifications can range from financial instability to erosion of public trust. Previous regulatory efforts, scattered across circulars and notifications, left loopholes and inconsistencies which sophisticated entities could exploit.

The Draft Directions, set to take effect from 1^st April 2026, are the RBI's answer to the increasing complexity of group structures and crossholdings in India's Non-Banking Financial Companies (“NBFC”) sector. The regime is designed not merely for compliance but for strategic reform, aligning practices with global standards while curbing the risk of regulatory arbitrage.

Applicability

These directions extend to all NBFCs, including Housing Finance Companies (“HFCs”), fundamentally altering the way related parties are identified, monitored, and captured under regulation. The Draft Directions adopts a broad definition of related parties, embracing directors, key managerial personnel, significant shareholders (over 5 per cent equity), their relatives, and any entities where such persons hold influence or control (directly or indirectly). The Loans to related parties are subject to a materiality threshold, tiered by the NBFCs category, from INR 1 Crore for base layer NBFCs up to INR 10 crore for upper and top layer NBFCs. Board approval is needed for any exposure above these ceilings, embedding top-level scrutiny at the heart of the process.

Pillars of Regulatory Framework

• Governance, Policy, and Oversight: The NBFC Board bears ultimate responsibility to institute robust mechanisms for identifying, approving, and monitoring related-party loans. The credit policy must detail aggregate & subgroup limits for related party lending, ensuring adherence to overall prudential exposure norms; positive reinforcement of whistleblowing, empowering staff to flag suspicious or unethical related party transactions without fear of reprisal; specific protocols for lending to senior officers and their relatives, targeting conflicts within the management core.

• Recusal and Independence: Perhaps the most notable feature is the mandatory recusal rule that any director or manager with a direct or indirect interest in a proposed related-party loan must abstain from all associated deliberations and decisions. This brings India's practice closer to global best standards, where individual recusal is a cornerstone of governance.

• Monitoring, Audit, and Reporting: For rigorous enforcement, the Draft Direction mandates ongoing, board-mandated updating of related party registers; periodic internal audit of compliance, with all deviations escalated to the audit committee; and annual declarations from directors/key management about loans availed by them or their associates. NBFCs must also make detailed disclosures on related party loans in their financial statements, including the top ten exposures, proportional analyses of bad loans, and specifics of contract terms, ushering in a new era of transparency.

• Enforcement, Penalties, and Repeal: Non-compliance with these directions may bring severe consequences, including monetary penalties, mandatory full provisioning, staff accountability exercises, forensic audits, or more intrusive supervisory sanctions. The draft also signals the repeal of earlier 2022 guidelines, consolidating the legal framework into a single, comprehensive directive.

Global Context and Strategic Significance

The RBI's initiative is not in isolation, but India's answer to global regulatory trends. International banking supervisors, including the Basel Committee, emphasise similar principles, including arm's length transactions, board oversight, and strong conflict-of-interest management. Forcing NBFCs to align their lending to related parties with these standards improves not only institutional resilience but also the credibility of India's financial system on the world stage.

How the 2022 RBI Circular and Draft Directions are Redefining Governance and Transparency in NBFC Related Party Transactions

The RBI's April 2022 circular on Loans and Advances – Regulatory Restrictions on NBFCs¹ established a rigorous, tiered framework for lending to directors, senior officers, their relatives, and connected entities, introducing board or committee approval requirements for high-value transactions, strict recusal procedures for any conflicted individuals, and detailed disclosure obligations for such exposures. This regulatory approach mandated that NBFCs maintain updated registers of related party loans, required annual reporting in financial statements, and imposed independent oversight for credit to senior officers' relatives, thereby reinforcing accountability and transparency across organisational hierarchies. These standards not only governed lending but also extended to awarding contracts, ensuring that the arm's length principle shaped all forms of related-party engagement, and collectively, these controls now serve as the foundational pillars that the Draft Directions are enhancing and harmonising for a more resilient and transparent NBFC sector.

Way Forward: A New Chapter for Prudential Norms

The RBI's draft directions for NBFC lending to related parties mark a pivotal shift. By placing transparency, governance, and diligence at the heart of the regulatory process, the central bank is positioning India's NBFC sector for long-term stability, investor confidence, and international respect. The transformation, while challenging for compliance departments, is unmistakably a leap towards greater integrity in financial intermediation. As this Draft Directions moves through stakeholder consultations and towards finalisation, every NBFC and corporate boardroom must prepare to recalibrate risk controls, lending policies, and internal reporting chains, ushering in a new era of prudence and accountability for India's dynamic financial sector.

Footnote

1. RBI Circular, Loans and Advances – Regulatory Restrictions – NBFCs, 19^th April 2022.

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