Related Party Lending: RBI rules for foreign banks

– Aparajita Das, Executive | corplaw@vinodkothari.com

The recently issued RBI (Commercial Banks – Credit Risk Management) Amendment Directions, 2026 has revised and consolidated the regulatory framework governing lending to related parties. The revised framework strengthens governance standards, expands the scope of “related parties”, and introduces enhanced approval, monitoring, and disclosure requirements. The amendments have been discussed briefly in our article here (for commercial banks) and here (for NBFCs). 

Section 20 of the Banking Regulation Act, 1949 places a statutory prohibition on lending to directors and entities in which directors are interested, to prevent conflict of interest, self-dealing, and misuse of depositor funds. Pursuant to clause (a) of Explanation to sub-section (4) thereof, Para 15A has been issued under the CRM Directions to clarify how these restrictions apply in the context of foreign banks operating in India through branches. Prior to the Amendment Directions, the same was specified in Para 15(2) of the erstwhile CRM Directions. 

The RBI has clarified that foreign banks cannot circumvent Section 20 merely because the Board is located outside India. The regulatory intent is to ensure functional and ethical parity between Indian banks and foreign bank branches operating in India, particularly in relation to related party exposure.

Applicability of Restrictions to Foreign Bank Branches, Officers, Boards and Foreign / Indian Entities 

 1.  Regulatory Background 

Related party lending by banks in India is primarily governed by section 20 of the Banking Regulation Act, 1949. 

Section 20(1) of the Act imposes statutory prohibition on banks from granting loans or advances to:

1.  any of its directors;
2. any firm in which a director is interested as partner, manager, employee or guarantor;
3. any company (other than permitted exceptions) in which a director holds substantial interest or is interested as director, managing agent, manager, employee or guarantor; and
4. any individual in respect of whom a director is a partner or guarantor.

The said provisions are mandatory and prohibitory in nature and are intended to prevent conflicts of interest and misuse of fiduciary position.

2. Applicability to Foreign Banks in India – Para 15A(1) of CRM Directions 

Para 15A, issued in pursuance of clause (a) of the Explanation to Section 20(4) of the BR Act, provides that the sanction or grant of credit facilities to companies in India by a foreign bank having branches in India shall be in compliance with the spirit of Section 20 of the Banking Regulation Act, 1949.

Accordingly, an Indian branch of a foreign bank shall not lend to any firm or company in India if: 

1. A Director on the Board of the foreign bank abroad has an interest in such firm or company;or
2. The company is a subsidiary of an Indian or foreign parent entity in which such Director is interested.

RBI in its direction has explicitly stated –

1. That a Director sitting on the foreign bank’s Board outside India is treated at par with a director of an Indian bank, for the purposes of Section 20.
2. That the location of the Board (abroad) or the incorporation of the bank outside India does not dilute the applicability of lending restrictions.

Therefore, Indian branches cannot claim regulatory insulation by arguing that the Director is not involved in Indian operations.

3. Exceptions and Permissible Transactions

The Directions provide limited and narrowly construed exceptions which includes:

1. Credit facilities granted prior to appointment of the Director, subject to no renewal, modification or enhancement till the conflict ceases;
2. Loan against own deposits, government securities or life insurance policies within the prescribed loans to value norms.
3. Personal loans to Directors provided to other employees as a part of the Policy or forming part of approved compensation  package of such director.
4. Advances to public trust where trustee is also a Director of the Lending Bank. 

4. Application to Officers and Specified Employees of Foreign Banks

Although Para 15A directly addresses directors, its effect extends to officers and senior management of foreign bank branches in the following manner:

1. Officers cannot sanction or process lending proposals that would violate Section 20 as clarified by Para 15A.
2. Internal delegation or operational autonomy does not override statutory prohibitions.

Further, under the Related Party Lending framework (Chapter V), officers classified as specified employees are subject to disclosure obligations, recusal from decision-making, arms-length pricing and approval norms as per the Credit Policy of the bank.

5. Application to Board of Directors of Foreign Bank (Abroad)

Para 15A squarely applies where a Director of the Foreign Bank abroad has substantial interest, control, directorship, promoter position or guarantee obligation in regard to the Indian Borrower Entity. In such a case, the Indian branch must treat the borrower as prohibited even if the lending transaction has taken place in India. The foreign Director has no role in the Indian branch.

The restriction extends to Indian subsidiaries of foreign holding companies, step down subsidiaries and group entities where foreign Director has any indirect interest.   

6. Application to Indian Entities

Indian entities are covered if a Foreign Bank’s Director has interest or control or if the entity is a subsidiary of any other Indian or foreign entity in which such Director is interested. However, the prohibition still applies, irrespective of the Indian entity being listed or unlisted or fund lending being fund based or non-fund based.

7. Application to Foreign Entities 

Similarly, on account of Para 15A, foreign persons and entities may also be treated as related parties due to control, shareholding, or board nomination rights where lending to foreign entities is otherwise permissible, materiality thresholds, Board/Committee approvals, and recusal norms shall apply and any structure designed to circumvent Para 15A through offshore routing may be treated as regulatory evasion.

8. Conclusion  

The norms clearly provide that the foreign banks must also follow regulatory requirements on conflict of interest specified in the BR Act read with CRM Directions. Thus, the Indian branches of foreign banks must carefully check the interests of overseas board members, and loan decisions must look at governance issues as well as normal credit risk. If these rules are not followed, the bank may face regulatory action, fines, and disciplinary action against staff.

Therefore, Para 15A makes sure that foreign bank branches in India follow the same ethical and safety standards as Indian banks. It stops foreign directors from indirectly giving benefits to themselves and protects the trust and stability of the Indian banking system. These rules apply broadly to foreign bank branches, their officers, overseas boards, and both Indian and foreign entities, based on who has interest, control, or influence and not on where they are located.

Our other resources:

1. Lending to your own: RBI Amendment Directions on Loans to Related Parties
2. Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting