In pursuance of the announcement made in the Statement on Developmental and Regulatory Policies dated December 8, 2023, the Reserve Bank of India (RBI) has issued draft directions for public comments on lending to related parties by regulated entities (REs) on Friday.
As part of this, the central bank has released the Reserve Bank of India (Urban Co-operative Banks – Lending to Related Parties) Directions, 2025.
The draft framework seeks to harmonise rules across entities and rationalise existing provisions by moving towards a principle-based approach.
The proposals include the introduction of scale-based materiality thresholds for related party lending, exclusion of independent directors of other banks from the definition of ‘related persons’, limited exemptions from the blanket bar under Section 20(1)(b) of the Banking Regulation Act, 1949, and stronger reporting and disclosure requirements.
Earlier, UCBs were completely barred from granting loans or advances to their directors, or to firms and companies where directors had an interest. The ban also covered individuals for whom directors acted as guarantors.
The new draft retains this principle but provides narrowly defined exceptions. These include loans sanctioned before a person became a director (though not renewable or extendable thereafter), loans against fully secured collateral such as government securities, insurance policies or fixed deposits, certain personal loans to directors and employee-directors within prudential limits, normal member loans to directors in salary earners’ co-operative banks, and non-fund-based facilities provided they are backed by 100 per cent cash collateral.
At the same time, stricter restrictions have been added. UCBs cannot lend to firms or companies where directors’ relatives are involved, and directors or their relatives cannot act as guarantors for any loan.
Any lending above the prescribed thresholds, from Rs 1 crore for Tier 1 UCBs to Rs 10 crore for Tier 4 UCBs, must be approved by the board. Directors with any direct or indirect interest will also have to recuse themselves from related decision-making.
The draft directions also mandate a robust oversight mechanism. Banks must maintain and update lists of related parties, conduct regular audits, report exposures to the RBI on a semi-annual basis via the DAKSH portal, and disclose such transactions in their financial statements. Any violations could attract penalties ranging from monetary fines to full provisioning requirements, forensic audits and operational restrictions.
The RBI has invited comments from the public and stakeholders on the draft by October 31, 2025. Feedback can be submitted through the ‘Connect2Regulate’ section on the RBI website, or sent to the Chief General Manager, Credit Risk Group, Department of Regulation, Reserve Bank of India, Central Office, Mumbai – 400 001. Submissions can also be made via email.
