The Reserve Bank of India (RBI) has unveiled the draft “Rural Co-operative Banks- Lending to Related Parties” Directions, 2025 for public consultation, aiming to tighten oversight of loans to directors and other related parties. The RBI’s draft rules mark a major tightening of governance in Rural Co-operative Banks, traditionally vulnerable to insider influence.
The draft introduces a structured framework with new safeguards, reporting requirements, and materiality limits, building upon existing statutory restrictions under the Banking Regulation Act.
For the first time, the draft specifies materiality thresholds for loans to related parties, including personal loans to directors, capped at Rs 1 crore. Any lending above this limit will require explicit approval from the bank’s board, ensuring stricter scrutiny of high-value transactions.
By capping loans to directors and related parties, banning them from acting as guarantors, and mandating board approvals, disclosures, and quarterly audits, the RBI aims to curb conflicts of interest and politically driven lending.
Rural Co-operative Banks (RCBs) will now prohibit loans to firms or companies where directors’ relatives hold an interest. Furthermore, directors, their relatives, and other related parties cannot act as guarantors or sureties for any credit facility, fund-based or non-fund-based, strengthening safeguards against conflicts of interest.
The draft mandates quarterly internal audits to monitor compliance with related party lending rules. Directors or key managerial personnel with a direct or indirect interest in a loan must recuse themselves from any decision-making process.
Banks are also required to include detailed provisions for lending to related parties in their credit policy, covering sub-limits, whistleblowing mechanisms, and measures to eliminate quid pro quo arrangements.
RCBs must report loans to related parties to NABARD on a semi-annual basis and disclose key details in their financial statements, including total outstanding loans, NPAs, and provisions. The draft also requires directors and KMPs to provide annual declarations of all loans availed by them and associated entities.
Non-compliance with the draft directions could trigger monetary fines, full provisioning, forensic audits, staff accountability exercises, and operational restrictions, giving RBI enforcement powers to ensure strict adherence.
To allow a smooth transition, existing loans not in compliance with the new rules can run off until maturity or up to one year from the issuance date, but cannot be renewed or enhanced unless aligned with the directions. The RBI has invited public comments and suggestions until October 31, 2025, which can be submitted through its website or via email to the Credit Risk Group, Department of Regulation.
The draft represents a significant step toward strengthening governance, transparency, and prudence in rural co-operative banks, addressing risks arising from related-party lending while allowing limited, controlled exceptions.
Mandatory reporting to NABARD and penalties for non-compliance signal stricter regulatory enforcement. The move is likely to enhance transparency, improve asset quality, and restore depositor confidence, but may face resistance from entrenched local power networks.
