BACKGROUND
The Reserve Bank of India (“RBI”) released the Draft Reserve Bank of India (Non-Banking Financial Companies – Lending to Related Parties) Directions, 2025 (“Draft Directions”) on October 1, 2025, inviting comments from stakeholders before its implementation from April 1, 2026.
This Draft Directions replaces the earlier circular — Loans and Advances – Regulatory Restrictions for NBFCs (dated April 19, 2022), issued under the Scale-Based Regulation (SBR) framework. The revision aims to broaden the regulatory perimeter, tighten governance, and harmonise the treatment of related-party transactions across different categories of NBFCs. The Draft Directions also cover Quid Pro Quo or reciprocal transactions/ lending will be considered as lending to a related party, while the duty cast on Internal and Statutory auditors to verify whether these extant guidelines have been duly followed while lending to related parties.
This article examines the key proposals introduced by the RBI under the Draft Directions, which are set to replace the existing relatively light-touch regulatory regime governing related-party transactions in NBFCs.
SCOPE AND APPLICABILITY
| Aspect |
2022 Guidelines |
Draft 2025 Directions |
|
Applicability |
Applied primarily to NBFCs in Middle Layer and Upper Layer. |
Applies to all NBFCs, including HFCs, bringing uniformity across the sector. |
|
Coverage |
Covered loans to directors, senior officers, and entities where they or their relatives held major shareholding. |
Extends to any related party or related person, covering direct and indirect exposures, contracts, and arrangements. |
The draft thus broadens the ambit to include non-fund-based exposures, contracts, and arrangements whereas the existing circular covers only loans and advances.
DEFINITION OF “RELATED PARTY” AND “RELATED PERSON”
Under existing norms, RBI restricts loan and advances to Directors, Senior Officers, their relatives and entities in which they are interested as a major shareholder, director or guarantor. Thus, under the extant regulations, the coverage is limited to directors and senior officers of NBFC. However, under the Draft Directions, the coverage gets expanded to cover not only promoters, directors, KMPs, but also includes persons (including juristic persons) who have at least 5% equity or voting rights in an NBFC and their related entities. Under the Draft Directions, two terms have been proposed: ‘Related person’ and ‘Related Parties’ which are defined as follows:
|
Related Person |
Related Parties, an entity is treated as a Related Party if: |
|
Is a promoter, director, or Key Managerial Personnel (KMP) of the NBFC. |
A Related Person or their relative is a partner, manager, KMP, director, or promoter of that entity. |
|
Owns more than 5% of the paid-up equity share capital of the NBFC. |
A Related Person or relative is a shareholder with:
|
|
Can nominate a director to the NBFC’s Board through an agreement with the NBFC. |
The Related Person or relative has control over that entity (alone or jointly). |
|
Is in “control” of the NBFC (either singly or jointly). |
The Related Person or relative holds more than 20% of voting rights, either directly or via a voting agreement. |
|
Is a Group Entity of the NBFC. |
The Related Person or relative can nominate a director to the entity’s Board. |
|
Relatives of the above persons are automatically included as Related Persons. |
The Related Person or relative is a guarantor or surety for that entity. |
|
|
The entity is a private trust where the Related Person or their relative is a trustee, author, or beneficiary. |
|
|
The entity is connected structurally as a subsidiary, parent, holding company, associate, or joint venture of another Related Person. |
Unlike the 2022 rules, which are limited to direct relationships, the new framework:
- Recognizes economic and managerial influence, not just ownership.
- Ensures arm’s length principles are enforced in lending.
- Aligns NBFCs with corporate governance best practices applicable to listed entities.
In essence, the RBI now expects NBFCs to treat all connected exposures with the same prudential caution as they would any external borrower, thereby closing the regulatory gaps that allowed indirect, related-party funding in the past.
Impact of the above change: The impact of the above will be dearer since a strategic investor having a stake of 5% or more and an entity having the right to nominate a director on the board of an NBFC will be considered as a ‘Related Person’ and thus also be regarded as ‘Related Party’. Besides these persons, their directors, KMPs and promoters, and group companies will be covered under the definition of ‘Related Parties’.
Credit Policy
The draft norms are proposed to make changes either in their current credit policy or to adopt a separate policy on “Lending to Related Parties” along with the risks that can be determined and mitigated are to be provided in that policy. The said Policy shall also include provisions to eliminate ‘Quid Pro Quo arrangements’ with the related/ unrelated parties, and in case of any whistleblowing against such practices, the Policy shall provide necessary safeguards to protect the whistleblower including employees thereof.
Further, the Policy shall provide a quantitative aggregate limit that can be attributed to ‘loan to related parties’, which can be further divided/ sub-categorised to a single related party or group of related parties. The Policy shall also have provisions related to loans to senior officers and their relatives of the NBFC.
Material Loans
Under the existing framework, loan exceeding Rs. 5 crores require the approval of the Board of Directors of NBFC while extending loans to directors, relatives and entities in which a director is a major shareholder, whereas in the case of loans to Senior Officers, the loan can be provided by the committee. Further, there is also a provision to recuse a related party from participating in the approval process either in the board meeting or committee meeting.
In the Draft Regulations, Material Threshold limits of the loan have been provided i.e. ₹10 crore for Upper/Top Layer, ₹5 crore for Middle Layer, ₹1 crore for Base Layer NBFCs. The Draft norms provide either the approval of the Board of Directors, or it can be delegated to a committee, while giving a loan meeting the threshold limits to related parties. However, the materiality threshold shall not be applicable in case a loan is provided to directors and senior officers against government securities, LIC/ FDs and nor is the same applicable where a loan is granted to a normal employee in the company. Besides, the Draft Directions not only provide recusal of a related party from participation in giving a loan, but also in monitoring or settlements of the said loan.
Clarity required: Whether the threshold limit is applicable to each related party or group of related parties, considering a wide range of definitions and whether per loan transaction or in aggregate will be considered to determine threshold limits.
Monitoring and Reporting
The Draft Directions require to update and review list of Related Parties periodically. Internal Auditor of NBFC is required to carry out a review of the loans to related parties on a quarterly basis and special attention be given to structured transaction which benefit the related parties indirectly or is in the nature of Quid Pro Quo. In case of Statutory Auditor, loans to related parties are required to be examined in line with the draft regulations based upon sampling whereas all the loans provided to related parties of NBFC shall be examined.
The 2025 draft mandates semi-annual reporting through RBI’s DAKSH portal, including details of sanctioned loans, arrangements, and non-compliance. These draft directions introduce enhanced disclosure norms in financial statements:
- Aggregate related party exposures.
- % of total credit exposure.
- SMA/NPA classification of related party loans.
- Proportion of related parties’ loan classified as SMA and NPA to total SMAs and NPAs.
- Top 10 exposures and provisioning details.
Annual Declarations from Directors
The Draft Directions propose to obtain an annual declaration from the directors and KMPs about the loans availed by them in individual capacity or their associated entities falling under related party transactions. In terms of existing directions, such a declaration needs to be obtained from the borrower and in case of false declaration, such a loan is required to be recalled by NBFC.
Clarity required: It is observed that these Draft Directions cover ‘Contract and Arrangements with the related parties’; however, these directions are silent on the process to carry out such transactions and monitoring thereof.
The Draft RBI Directions on Lending to Related Parties (2025) represent a pivotal step toward embedding stronger governance and transparency within the NBFC sector. By expanding the ambit of “related parties” to include promoters, key managerial personnel, significant shareholders, group entities, and even trusts, the Reserve Bank of India aims to close long-standing regulatory gaps that allowed indirect or proxy lending.
The draft regulations shift the emphasis from a transaction-based approach to a relationship- and influence-based framework, ensuring that every connected exposure is subject to prudential oversight and arm’s-length discipline. With enhanced requirements for Board approval, recusal of interested members, auditor scrutiny, and robust disclosure norms, the framework promotes ethical decision-making and institutional accountability.
Once implemented, these directions are expected to strengthen corporate governance, reduce conflicts of interest, and enhance stakeholder confidence in NBFC operations. Ultimately, the new regime reinforces RBI’s vision of a resilient, transparent, and well-regulated non-banking financial ecosystem.
