Updates to RBI’s PSL Directions: Clarifications and Minor Amendments
Harshita Malik | finserv@vinodkothari.com
Refer our detailed write-up on the topic titled as Bank-NBFC Partnerships for Priority Sector Lending: Impact of New Directions
Archive for year: 2026
RBI Integrated Ombudsman Scheme 2026 – Key Changes
– Chirag Agarwal & Siddharth Pandey | finserv@vinodkothari.com
Background
The framework for Integrated Ombudsman Scheme (IOS) constitutes a cornerstone of the RBI’s customer protection and grievance redressal mechanism across the financial sector. With the objective of providing customers a single, unified and accessible platform for redressal of complaints against Regulated Entities, the RBI introduced the Integrated Ombudsman framework.
The RBI has now introduced the Reserve Bank – Integrated Ombudsman Scheme, 2026 (“IOS 2026”), which supersedes the earlier Reserve Bank – Integrated Ombudsman Scheme, 2021 (“IOS 2021”). The new Scheme shall come into force with effect from July 1, 2026.
Key Changes
The IOS 2026 seeks to refine and reinforce the existing mechanism by expanding the scope of coverage, strengthening the powers of the Ombudsman, tightening procedural timelines, enhancing disclosure and reporting. The table below highlights and analyses the key changes introduced under IOS 2026 as compared to the IOS 2021, to enable stakeholders to assess the regulatory and operational impact of the revised framework.
| Provision | IOS 2021 | IOS 2026 | Analysis / Impact |
| Definition of “Customer” & “Deficiency in Service” | The term “Customer” was not defined. Limited definition for ‘Deficiency in Service’, largely linked to users/applicants of financial services. | ‘Customer’ means a person who uses, or is an applicant for, a service provided by a Regulated Entity. (Para 3(1)(h)) ‘Deficiency in Service’ now applicable across all services provided by Regulated Entities and not just restricted to financial services. (Para 3(1)(i)) | Broadens the scope of protection by covering all services offered by Regulated Entities, not just financial services. |
| Definition of “Rejected Complaints” | Not expressly defined | New definition introduced – complaints closed under Clause 16 of the Scheme. (Para 3(1)(o)) | Clarificatory in nature; definition is not used elsewhere in the Scheme |
| Power to Implead Other Regulated Entities | No explicit power | Ombudsman empowered to make other Regulated Entities a party to the complaint if such Regulated Entity has, by an act, negligence, or omission, failed to comply with any directions, instructions, guidelines, or regulations issued by the RBI. (Para 8(6)) | Expands investigative and adjudicatory powers of the RBI Ombudsman |
| Annual Report on Scheme Functioning | The Ombudsman was required to submit an annual report to the Deputy Manager of the RBI; however, the RBI was not obligated to publish it. | It has now been made mandatory for the RBI to publish an annual report on the functioning and activities carried out under the Scheme. (Para 8(7)) | Enhances transparency and public accountability of the Ombudsman framework |
| Interim Advisory | No express provision | Ombudsman expressly empowered, if deemed necessary and based on the circumstances of the complaint, to issue an advisory to the RE at any stage to take such action as may lead to full or partial resolution and settlement of the complaint. (Para 14(6)) | Enables interim reliefs/directions and more effective complaint handling. This would help in resolving disputes by settlement at any stage. IOS permits advisories i.e., communications from the Ombudsman advising REs to take actions for full or partial complaint resolution. Advisories are non-binding and serve as a pre-award tool to facilitate quicker settlements. |
| Principal Nodal Officer (PNO) – Change Reporting | Reporting obligation not specified | Any change in appointment or contact details of PNO must be reported to CEPD, RBI (prior to change or immediately post-change) (Para 18(2)) | Additional intimation requirement for regulated entities |
| Compensation – Consequential Loss | Capped at ₹20 lakh | Enhanced to ₹30 lakh (Para 8(3)) | Increases the limit of potential financial risk for Regulated Entities |
| Compensation – Harassment & Mental Anguish | Consolatory damages capped at ₹1 lakh | Increased to ₹3 lakh (in addition to other compensation) (Para 8(3)) | Compensation limit tripled |
| Limit on Amount in Dispute | No monetary cap | No change – still no limit (Para 8(3)) | Ombudsman continues to have wide jurisdiction irrespective of dispute value |
| Timeline for Filing Complaint | 1 year from RE’s reply; or 1 year + 30 days if no reply from RE | Complaint must be filed within 90 days from the expiry of the RE’s response timeline (30 days) or last communication, whichever is later. (Para 10(1)(g)) | Considerably tightens timelines; this would mean the customers must act swiftly |
| Guidance on Complaint Filing | Dispersed across the Scheme | Consolidated guidance provided in Part A of the Annexure along with Complaint Form. (Annex) | The guidance merely reiterates the points from the scheme that relate to admissibility of a valid complaint, but this is useful for the complainant as he will be aware of the complaint filing requirements and shall not be required to be thorough with the scheme itself |
| Modes of Filing Complaint | Specified the options to file a complaint through portal, email, or courier at CRPC. | Explicitly specified the email-ID of CRPC, and the address at which the complaint shall be couriered. (Para 6(2)) | Specification of the details for filing complaint |
| Data Consent in Complaint Form | No explicit consent requirement | Explicit consent for use of personal data mandatory. (Annex) | Aligns complaint process with evolving data protection and privacy standards |
| Categorisation of Complaints in complaint form | Limited classification | Detailed categorisation of complainant type and nature of complaint. (Annex) | Enables better routing, analytics, and faster resolution |
| Maintainability Check in Complaint Form | No upfront maintainability warning | Explicit note stating non-maintainable scenarios (court pending, advocate filing, etc.). (Annex) | Reduces frivolous filings and early-stage rejections |
| Appellate Authority | Executive Director in charge of concerned RBI department | Executive Director in charge of Consumer Education and Protection Department (CEPD) explicitly designated. (Para 3(1)(a)) | Clarificatory in nature |
| Introduced system-based validation | No such provision | Complaints received via portal, will undergo a system-based validation/check and will be rejected at the outset for being non-maintainable complaints. For the complaints received via e-mail and physical mode, CRPC will assess their maintainability under the Scheme. (Para 12(1)) | This would enhance the “gatekeeping” responsibility of the CRPC, which should speed up the process for valid complaints by weeding out inadmissible ones. |
Actionables for REs:
- REs should review and align their internal grievance handling and escalation processes to ensure all service-related complaints are covered.
- REs shall provide prior intimation to the CEPD, RBI for any change in the appointment or contact details of the Principal Nodal Officer (PNO)
- REs shall take note of the enhanced compensation limits under the Scheme and accordingly reassess potential liabilities, update grievance redressal frameworks, and sensitize relevant teams to ensure compliance with revised thresholds.
- Para 18, as in the earlier Scheme, requires REs to display the salient features of the Scheme, a copy of the IOS 2026, and the updated contact details of the Principal Nodal Officer on their website and at their branches/places where the business is transacted.
Other Related Resources:
Internal Ombudsman for NBFCs: RBI’s 2026 Framework at a Glance
Manisha Ghosh, Senior Executive | finserv@vinodkothari.com
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Open in new tab From Capital Assets to Stock-in-Trade: Taxing “Notional” Gains in Amalgamations
Decoding Supreme Court ruling in Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi
– Sourish Kundu | corplaw@vinodkothari.com
One of the most common modes of corporate restructuring is merger, and one of the most crucial aspects in assessing the commercial viability of a proposed merger is its tax implications. Typically, in a merger, the shareholders of the transferor company are issued shares of the transferee company in order to avail the exemption under section 70(1)(f) of the IT Act, 2025 [corresponding to section 47(vii) of the IT Act, 1961]. The said provision grants exemption in case of scheme of amalgamation in respect of the transfer of a capital asset, being shares held by a shareholder in the transferor company, where (i) the transfer is made in consideration of the allotment of shares in the transferee company (other than where the shareholder itself is the transferee company) and (ii) the amalgamated company is an Indian company.
However, a recent Supreme Court ruling in the matter of Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax Delhi-II, New Delhi [2026 INSC 46] has opened a new avenue for debate w.r.t the taxation on receipt of shares of the transferee company in a scheme of amalgamation. In this case, the Supreme Court ruled that the exemption as provided under section 47(vii) of the IT Act, 1961 [corresponding to section 70(1)(f) of the IT Act, 2025] shall not be available to shareholders of the transferor company who are not perceived as “investors”, that is to say long term investors as opposed to traders, in the transferor company. And accordingly, any notional gain in a share swap deal pursuant to an amalgamation shall be taxed u/2 28 of the IT Act, 1961 [corresponding to section 26 of the IT Act, 2025].
In this article, we decode the nuances of the ruling, the impact it is expected to have in the sphere of merger deals and other related concerns.
Difference between capital and business assets
So far, the common understanding of consideration in case of amalgamations was that an amalgamation is merely a statutory replacement of one scrip for another, with no real “transfer” or “income” until the new shares are actually sold for cash, or in other words, mere substitution of shares in the books of the involved entities. However, the Apex Court in the instant judgement has now effectively set a different precedent for those holding shares as stock-in-trade, i.e. current investments.
The Court clarified that while Section 47(vii) provides a safe harbor for investors (treating mergers as tax-neutral corporate restructuring), this exemption does not extend to “business assets”, a.k.a. stock in trade. For a trader and investment houses, shares held in stock-in-trade represent “circulating capital”, and the objective of holding them is not capital appreciation, but conversion into money in the ordinary course of business. Therefore, replacing shares of an amalgamating company with those of an amalgamated company of a higher, ascertainable value constitutes a “commercial realisation in kind”.
The 3 pillar test for taxability
The SC applying the doctrine of real income emphasised in Commissioner of Income-Tax v. Excel Industries Ltd. and Anr. [(2013) 358 ITR 295 (SC)], established a three-pillar test, which is to be applied on a case to case basis to determine if allotment of shares pursuant to a merger triggers taxation of business income u/s 28 of the IT Act, 1961:
- Cessation of the Old Asset: The original shares must be extinguished in the books of the assessee.
- Definite Valuation: The new shares must have an ascertainable market value.
- Present Realisability: The shareholder must be in a position to immediately dispose of the shares and realise money.
This test was further elaborated by two situations viz. allotted shares being subject to a statutory lock-in, which hinders the disposability of the asset, and allotted shares being unlisted, which cannot be said to be realisable, since no open market exists to ascribe a fair disposal value.
Additionally, the SC also held that the trigger is the date of allotment of the shares of the amalgamated entity, and neither the “appointed date” nor the “date of court sanction” or what is called as “effective date” in the general parlance, as no tradable asset exists in the shareholder’s hands until the scrips are actually issued.
Critical Concerns
While the ruling provides reasonable clarity on the treatment of shares received as a result of amalgamation, when the same is held in inventory, it leaves several operational questions unanswered, leaving a gap to determine the commercial feasibility of these deals.
- Treatment of profits and losses alike
If the Revenue can tax “notional” gains arising from a higher market value at allotment, correspondingly assessees should be allowed to book notional losses, if any on such deals as well. In cases where a merger swap ratio or a market dip results in the new shares being worth less than the cost of the original holding, the taxpayer should, by the same logic, be entitled to claim a business loss u/s 28 of the IT Act, 1961, or in other words, if the substitution is a “realisation” for profit, it must be a “realisation” for loss as well.
- Increase in cost of acquisition
A major concern is the potential for double taxation. If the assessee is taxed on notional gain, being the difference between the cost of acquisition of the original shares and the FMV of the shares of the transferee company on the date of allotment, such FMV should logically become the new cost of acquisition. If an assessee is taxed on the difference between the book value and the FMV at the time of allotment, but the increased cost of acquisition is not allowed, the same appreciation gets taxed twice. It is first taxed as business income at the time of allotment and again at the time of the actual sale.
- Determination of the nature of shares as “stock in trade” vs “capital asset”
This issue remains prone to litigation, that is, who determines the nature of the investment, whether it is current or non-current? Will it be determined basis the books of account of the investor?
A CBDT circular lays down certain principles along with some case laws to distinguish between shares held as stock-in-trade and shares held as investments, and decide the treatment of shares held by the investing company. Further, factors such as intention of the party purchasing the shares, [discussed by Lord Reid in J. Harrison (Watford) Ltd. v. Griffiths (H.M. Inspector of Taxes); (1962) 40 TC 281 (HL)], and method of recording the investments [highlighted in CIT v. Associated Industrial Development Co (P) Ltd (AIR1972SC445)], are considered as the deciding factors for making a demarcation between treating an asset as capital asset or stock-in-trade.
As highlighted in the instant case, while the initial classification is made by the companies in the financial statements, the AO is empowered to overlook the same, and determine whether the shares were held as stock-in-trade or as capital assets, as without that determination, the taxability or eligibility for exemption u/s 47 could not be ascertained.
It should be noted that the line between a long-term strategic investment and a trading asset is often thin, and the Jindal ruling places the burden on the Revenue to prove the stock status and the “present realisability” of the shares.
Conclusion
Proving by contradiction, the Apex Court has added that: “If amalgamations involving trading stock were insulated from tax by judicial interpretation, it would open a ready avenue for tax evasion. Enterprises could create shell entities, warehouse trading stock or unrealised profits therein, and then amalgamate so as to convert them into new shares without ever subjecting the commercial gain to tax. Equally, losses could be engineered and shifted across entities to depress taxable income. Unlike genuine investors who merely restructure their holdings, traders deal with stock-in-trade as part of their profit-making apparatus; to exempt them from charge at the point of substitution would undermine the integrity of the tax base”
Discussing the concept of “transfer”, “exchange” and “realisability”, the SC has affirmed that mergers do not entail a mere replacement of shares of one company with that of another, as for persons holding the same as stock-in-trade cannot be said to be a continue their investment, instead the new shares being capable of commercial realisation gives rise to taxable business income. The Jindal Equipment ruling seems to effectively end the assumption of automatic tax neutrality for all merger participants, subject to fulfillment of applicable conditions prescribed in the IT Act. As a result, if the tax officers believe that the shareholders hold the shares as stock in trade, and could cash out the same at the next possible instance, the assessee shall be under the obligation to pay tax even without encashing any gain in actuals. Further, the tax implications in such cases shall not be at the special rates prescribed for capital gains.
Read more:
Understanding “Undertaking” in the Context of Investment Demergers
Budget 2025: Mergers not to be used for evergreening of losses
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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:
- any of its directors;
- any firm in which a director is interested as partner, manager, employee or guarantor;
- 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
- 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:
- A Director on the Board of the foreign bank abroad has an interest in such firm or company;or
- 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 –
- 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.
- 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:
- Credit facilities granted prior to appointment of the Director, subject to no renewal, modification or enhancement till the conflict ceases;
- Loan against own deposits, government securities or life insurance policies within the prescribed loans to value norms.
- Personal loans to Directors provided to other employees as a part of the Policy or forming part of approved compensation package of such director.
- 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:
- Officers cannot sanction or process lending proposals that would violate Section 20 as clarified by Para 15A.
- 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:
Shastrarth 26 – Loans to related parties by banks and NBFCs
In this edition of Shastratha, we deliberate on the regulatory framework, key concerns, and practical considerations relating to loans to related parties by banks and NBFCs, including governance expectations, prudential limits, and recent regulatory developments impacting such transactions.
Shastrarth can be viewed here – https://youtube.com/live/o87BhAcZPio
Our other resources on the subject:
https://vinodkothari.com/2026/01/rbi-brings-revised-norms-on-related-party-lending-and-contracting/
PPT for Shastrarth:
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Lending to your own: RBI Amendment Directions on Loans to Related Parties
-Team Finserv | finserv@vinodkothari.com
On January 5, 2026, the RBI issued the Amendment Directions on Lending to Related Parties by Regulated Entities. Pursuant to this, changes were introduced to Reserve Bank of India (Non-Banking Financial Companies – Credit Risk Management) – Amendment Directions, 2026 (CRM Amendment Directions) and Reserve Bank of India (Non-Banking Financial Companies – Financial Statements: Presentation and Disclosures) Directions, Amendment Directions, 2026. Previously, Draft Directions were also issued on the subject. Our write-up on the draft directions can be accessed here.
Highlights
Applicability and Effective Date
The amendments under CRM Directions shall apply to all NBFCs, including Housing Finance Companies (HFCs) with regard to lending by an NBFC to its ‘related party’ and any contract or arrangement entered into by an NBFC with a ‘related party’. However, Type 1 NBFCs and Core Investment Companies shall not be covered under the applicability.
These amendments shall come into force on 1 April 2026. NBFCs may, however, choose to implement the amendments in their entirety from an earlier date.
In addition to complying with the provisions of the Amendment Directions, listed NBFCs shall continue to adhere to the applicable requirements of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time.
Grandfathering of existing arrangements: Existing RPTs that are not compliant with these amendments may continue until their original maturity. However, such loans, contracts, or credit limits shall not be renewed, reviewed, or extended upon expiry, even where the original agreement provides for renewal or review.
Any enhancement of limits sanctioned prior to 1st April 2026 shall be permitted only if they are fully compliant with these amendments.
Relevant Definitions
Related Party
| RPs under Amendment Directions | Whether covered in the Present Regulations |
| (A) Related Persons: These can be non-corporate | |
| a promoter, or a director, or a KMP of the NBFC or relatives of the said (natural) person | All other persons except the promoter was covered |
| Person holding 5% equity or 5% voting rights, singly or jointly, or relatives of the said (natural) person | No |
| Person having the power to nominate a director through agreement, or relatives of the said (natural) person | No |
| Person exercising control, either singly or jointly, or relatives of the said (natural) person | Yes |
| (B) Related Parties: These can be any person other than individual/HUF, and cover Entities where (A) | Covered Partially |
| is a partner, manager, KMP, director or a promoter | Promoter not covered |
| hold/s 10% of PUSC | Holds lower of (i)10% of PUSC and (ii)₹5 crore in PUSC |
| has single or joint control with another person | Yes |
| controls more than 20% of voting rights | No |
| has power to nominate director on the Board | No |
| are such on the advice direction, or instruction of which the entities are accustomed to act | No |
| is a guarantor/surety | Yes |
| is a trustee or an author or a beneficiary (where entity is a private trust) | No |
| Entities which are related to (A) as subsidiary, parent/holding company, associate or joint venture | Yes |
The definition of “Related Party” remains unchanged from that provided under the Draft Directions.
Further, a clarification have been added where an entity in which a related person has the power to nominate a director solely pursuant to a lending or financing arrangement shall not be regarded as a related party.
Related Person
Under the Draft directions, the definition of a “related person” included group entities. However, pursuant to the Amendment Directions, group entities have been expressly excluded from the scope of “related person.” The provisions are specific for lending to directors, KMPs and their related parties. In the case of lending to entities such as subsidiaries and associates, the NBFC must adhere to the concentration norms as prescribed under the CRM Directions.
Specified Employees
The definition of “Senior Officer” as provided under the erstwhile regulations (Para 4(1)(vii) of the Credit Risk Management Directions) has been omitted and, in its place, the concept of “Specified Employees” has been introduced. “Specified Employees” has been defined to mean all employees of an NBFC who are positioned up to two levels below the Board, along with any other employee specifically designated as such under the NBFC’s internal policy.
Under the erstwhile regulations, the term “Senior Officer” was given the same meaning as defined under Section 178 of the Companies Act, 2013. Thus, the terms Senior Officer included the following:
- Members of the core management team,
- All members of management who are one level below the Executive Directors,
- Functional heads
Practically, this change implies that one additional hierarchical level would now need to be designated as “Specified Employees”. Further, the specific inclusions that earlier applied under the Companies Act and the LODR Regulations i.e., functional heads under the Companies Act and CS and CFO under the LODR will no longer be automatically covered, unless they fall within two levels below the Board or are specifically designated as such under the NBFC’s internal policy.
Meaning of “Lending”
‘Lending’ in the context of related party transactions would include funded as well as non-fund-based credit facilities to related parties. It may further be noted that investments in debt instruments of related parties are specifically included within the ambit of lending. Accordingly, the scope is not just restricted to loans and advances but includes all fund based and non-fund based exposures as well as investment exposures.
Principles to be followed while lending to a related party
While lending to related parties, the following principles and provisions are to be followed by NBFCs:
- Credit Policy
The credit policy of the NBFC must contain specific provisions on lending to RPs. Mandatory contents of such policy will include:
- Definition of RPs and Specified Employees
- Safeguards to address the risks emanating from lending to related parties
- Provisions relating to lending to ‘specified officers’ of the NBFC and their relatives
- Provisions related to a suitable whistleblower mechanism for employees to raise concerns over irregular and unethical loans to RPs. Any kind of quid pro quo arrangements should also be prohibited.
- Materiality Thresholds for sanctioning of the loans
- Interested parties to recuse themselves
- Limits for lending to RPs, including sub-limits for lending to a single related party and a group of related parties
- Monitoring mechanism for such loans to RPs. This would include the designation of a specified authority for monitoring as well as reporting to the Board/Board committee. Further, procedure in case of deviation from the policy must also be prescribed.
Earlier, the policy requirement was specifically applicable in case of base layer NBFCs, but now the same has been made applicable for all NBFCs.
- Board approved limits for lending to RPs
The CRM Amendment Directions also mandate prescribing board-approved limits for lending to RPs. Further, sub-limits will also have to be prescribed for lending to a single RP and a group of RPs. Here, a question may arise on what basis will the NBFC prescribe such limits? Such limits may be prescribed after considering the ticket size of the loans generally offered by the Company, to ensure the loans to RPs are aligned with the loan products for general customers. The limit may be specified as a percentage of the NOF of the NBFC, similar to the credit concentration limits.
- Materiality Thresholds
NBFCs may extend credit facilities to related parties in accordance with their Board-approved credit policy. Any such lending must be within the board-approved limit prescribed for lending to RPs (including a single RP and a group of RPs).
Further, under the Amendment Directions (Para 13G of the CRM Amendment Directions), RBI has now clearly laid down materiality thresholds for such lending to related parties, including those to directors, senior officers, and their relatives. Lending above the prescribed materiality threshold should be sanctioned by the Board/Board Committee of the NBFC. (other than the Audit Committee).
It may be noted that earlier, for middle and upper layer NBFCs, any loans aggregating to ₹ 5 Crore and above were to be sanctioned by the Board/Board Committee. The materiality thresholds prescribed under the Amendment Directions are based on the layer of the NBFC, as follows:
| Category of NBFCs | Materiality Threshold |
| Upper Layer and Top Layer | ₹10 crore |
| Middle Layer | ₹5 crore |
| Base Layer | ₹1 crore |
| Layer of the NBFC shall be based on the last audited balance sheet.For loans, materiality threshold shall apply at individual transaction level | |
Can the power to sanction loans be delegated to the Audit Committee?
The CRM Amendment Directions have defined the Committee on lending to related parties which will mean a committee of the Board of the NBFC entrusted with sanctioning of loans to related parties. NBFCs may also identify any existing Committee, other than the Audit Committee, for this purpose.
Further, para 13I provides that,
However, a NBFC at its discretion, may delegate the above powers of lending beyond the materiality threshold to a Committee of the Board (hereafter called Committee) other than the Audit Committee of the Board
Accordingly, on a reading of the above, it seems that the power to sanction loans cannot be provided to the Audit Committee of the Board.
- Monitoring and Reporting Mechanism
- NBFC shall maintain and periodically update the list of all related persons, related parties, and loans sanctioned to them. This will be in addition to the list of related parties of the NBFC, which comes from the Companies Act, 2013, LODR and Accounting Standards.
- The list shall be reviewed at regular intervals to ensure accuracy and compliance.
- Credit facilities sanctioned to specified employees and their relatives shall be reported to the Board annually.
- Any deviation from the lending policy on related parties, along with reasons, shall be reported to the Audit Committee or to the Board where no Audit Committee exists.
- Products/structures circumventing these Directions (reciprocal lending, quid pro quo) shall be treated as related party lending.
5. Quid Pro Quo Arrangements
The CRM amendment directions also provide that any arrangements which aim at circumventing the Amendment Directions will be treated as lending to RPs. Accordingly, any such arrangements involving reciprocal lending to related parties shall be subject to all the provisions of this direction.
- Refrain from participation
Para 13J requires that Directors, KMPs and specified employees must recuse themselves from any deliberations or decision-making on loan proposals, contracts or arrangements that involve themselves or their related parties. This obligation also applies to all subsequent decisions involving material changes to such loans, including one-time settlements, write-offs, waivers, enforcement of security and implementation of resolution plans, to ensure independence and avoid conflicts of interest.
Financial Statements Disclosures
Details of exposure to related parties as per these Directions shall be disclosed in the Notes To Accounts pursuant to para 21(9A) of the Reserve Bank of India (Non-Banking Financial Companies – Financial Statements: Presentation and Disclosures) Directions, 2025 in the following format:
| (Amt in ₹ Crore) | |||
| Sr. No | Particulars | Previous Year | Current Year |
| Loans to Related Parties | |||
| 1 | Aggregate value of loans sanctioned to related parties during the year | ||
| 2 | Aggregate value of outstanding loans to related parties as on 31st March | ||
| 3 | Aggregate value of outstanding loans to related parties as a proportion of total credit exposure as on 31st March | ||
| 4 | Aggregate value of outstanding loans to related parties which are categorized as: | ||
| (i) Special Mention Accounts as on 31st March | |||
| (ii) Non-Performing Assets as on 31st March | |||
| 5 | Amount of provisions held in respect of loans to related parties as on 31st March | ||
| Contracts and Arrangements involving Related Parties | |||
| 6 | Aggregate value of contracts and arrangements awarded to related parties during the year | ||
| 7 | Aggregate value of outstanding contracts and arrangements involving related parties as on 31st March | ||
Comparison at a Glance
| Parameters | Existing Guidelines | Amendment Directions |
| Applicability | NBFC-BL- only policy requirement was prescribedNBFC-ML and above – threshold, approval and reporting was applicable | NBFCs in all layers, except Type 1 and CICs |
| Materiality Threshold/ Threshold for seeking board approval | NBFCs-BL- As per the PolicyNBFCs-ML- Rs. 5 croreNBFCs-UL- Rs. 5 crore | NBFCs-BL- Rs. 1 croreNBFCs-ML- Rs. 5 croreNBFCs-UL- Rs. 10 crore. Lending beyond the MT requires board or board committee approval (other than AC). |
| Board approved limits for lending to RPs | No such limit was required to be prescribed | Policy shall specify aggregate limits for loans towards related parties. Within this aggregate limit, there shall be sub-limits for loans to a single relatedparty and a group of related parties.Lending beyond the board approved limit, requires ratification by the Board/AC. |
| Monitoring | Loans and Advances to Directors less than ₹5 crores shall be reported to the Board. Further, all loans and advances to senior officers shall be reported to the Board. | Para 13K: Maintain and periodically update list of related persons, related parties, and loans to them. Para 13L: Annually report credit facilities to specified employees and relatives to the Board. Para 13M: Quarterly or shorter internal audit reviews on adherence to related party guidelines. Para 13N: Report deviations and reasons to the Audit Committee or Board. Para 13O: Products/structures circumventing Directions (reciprocal lending, quid pro quo) shall be treated as related party lending. |
| Policy Requirement | Only for NBFC-BL. NBFCs were required to prescribe a threshold beyond which the loans shall be required to be reported to the Board | Applicable for all NBFCs. |
| Recusal by interested parties | Directors who are directly or indirectly concerned or interested in any proposal should disclose the nature of their interest to the Board when any such proposal is discussed | Interested parties, including specified employees to recuse themselves |
| Disclosure under FS | Related Party Disclosure were specified as per format prescribed under Para 21(9) of Financial Statement Disclosures Directions | In addition to the earlier requirement, another format has been prescribed under Para 21(9A) with respect to details of exposures to related parties |
| Power to sanction loans to RPs | For NBFCs-BL: Only reporting is required; no board approval For NBFCs-ML and above: Board approval required for loans above the threshold. | For all NBFCs:Loans above materiality threshold shall be sanctioned by Board or delegated Committee (not Audit Committee) Loans below the threshold shall be sanctioned by appropriate authority as defined under the Policy. |
Our Other Resources:
Credit Risk Management Rules modified: RBI brings revised norms on Related Party Lending and Contracting
– Team Corplaw | corplaw@vinodkothari.com
Continuing with the spree of regulatory changes brought in 2025, RBI has issued Amendment Directions on Lending to Related Parties by Regulated Entities. Separate notifications have been issued for each regulated entity, based on the draft Directions for lending and contracting with related parties issued on 3rd October, 2025. We discuss the changes brought in for commercial banks by way of the RBI (Commercial Banks – Credit Risk Management) – Amendment Directions, 2026 and RBI (Commercial Banks – Financial Statements: Presentation and Disclosures) – Amendment Directions, 2026.
Highlights:
- New rules apply from 1st April, 2026. Existing facilities, if in breach of the new provisions, can continue to run down; however, shall not be renewed or extended
- Related Party: the meaning of the word is quite different from the commonly understood expression under the SEBI Regulations or Companies Act. Hence, banks will maintain a parallel list of related parties under the CRM Directions
- Primarily concerned with directors, KMPs and their interested persons and entities
- Related party = Related person (RP) + Reciprocally Related person (RRP) + Specific entities in which RP or RRP are interested
- Contracts or arrangements enumerated in sec. 188 (1) of Companies Act also covered
- Lending to or contracts with Specified Employees
- means employees 2 levels below the Board or as designated by the Board
- left to the Policy to be framed by the Bank
- To be reported to the Board annually
- Board approved Policy on CRM
- To include aspects related to lending to RPs
- Specify aggregate limits and sub-limits for lending to RPs including single RPs
- To incorporate whistleblower mechanism to raise concerns over questionable loans to RPs and quid pro quo arrangements
- Any deviation from policy to be reported to Audit Committee
- Restrictions on lending by banks
- to its promoters and their relatives; shareholders with shareholding of 10 per cent or more in the paid-up equity capital of the bank; as also the entities in which they (promoters, their relatives and shareholders as stated above) have significant influence or control (as defined under Accounting Standards Ind AS 28 and Ind AS 110).
- In addition to restrictions on lending to directors and interested entities under section 20 of BR Act
- “Materiality threshold” for lending to related parties
- based on the capital of the bank – from Rs 5 crores to Rs 25 crores
- lending over the materiality threshold requires approval of board/ a committee on lending to RPs
- Does not include (i) credit facilities fully secured by cash or liquid securities, and (ii) interbank loans
- Committee on lending to RPs
- Bank may identify any existing committee, other than the Audit Committee
- Does it mean the Audit Committee cannot sanction approval for loans to RP?
- Recusal of interested parties from deliberations and discussions on loan proposals, contracts or arrangements involving them or their related parties
- Internal auditors to review, on a quarterly or shorter intervals, adherence to the guidelines and procedures in relation to related party lendings.
Immediate Actionables
- Designate a board committee for sanction of loans to related parties beyond materiality thresholds
- Identify and maintain a list of related parties as per the definition under the Amendment Directions
- Modify and adopt a revised Credit Risk Management Policy in line with the requirements of the Amendment Directions
- Adopt limits and sub-limits for (a) aggregate transactions with RPs, (b) transactions with each RP and (c) transactions with a group of RPs
- Sensitise relevant business teams on the materiality thresholds and the internal Credit Policy of the Bank
- Engage the services of internal auditors for periodic review (quarterly or shorter intervals)
RPT Framework: Amendment Directions vis-a-vis Companies Act and LODR
| Point of comparison | CRM Amendment Directions | Listing Regulations | Companies Act |
| Scope of coverage | Loans, non-funded facilities, investment in debt securities | Any transfer of resources, obligations or services | Contracts as enumerated u/s 188 (1) |
| Meaning of related party | Directors, KMPs, promoter, their relatives, entities in which either of them have specified interest (partnership, shareholding, control, etc).Does not include Company’s own holding company, subsidiaries or associates | Wide definition, including sec 2 (76) of CA, accounting standards, promoter, promoter group entities, shareholders with 10% or more shareholding | As defined in sec. 2 (76), primarily including directors, KMPs, their relatives, private cos where such persons are a director or member, public companies with directors’ 2% shareholdings.Includes entity’s own subsidiaries, associates, JVs, holding company |
| Concept of “reciprocally related party” | In line with the statutory restrictions, includes directors/relatives on the boards of other banks, AIFIs, trustees of mutual funds set up by other banks | Does not exist; however, a purpose-and-effect test exists whereby surrogate transactions may be covered. | Does not exist |
| Primary approving body | Committee on Lending to Related Parties, or the Board | Audit Committee | Audit Committee; or the Board |
| Shareholders’ approval | Not required | Required if crossing materiality threshold | Required if not on in ordinary course of business+ arm’s length, and crossing materiality threshold |
| Materiality threshold | Being linked with a single loan exposure, ranges from Rs 5 crores to Rs 25 crores depending on Bank’s capital | Being aggregated for transactions during a FY, ranges from 10% of the entity’s consolidated turnover to Rs 5000 crores based on consolidated turnover of the entity | Usually based on 10% of turnover or net worth (depending on transaction type) |
See our related resources here:
https://vinodkothari.com/2026/01/shastrarth-26-loans-to-related-parties-by-banks-and-nbfcs/
