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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
– Chirag Agarwal & Siddharth Pandey | finserv@vinodkothari.com
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.
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. |
Other Related Resources:
Manisha Ghosh, Senior Executive | finserv@vinodkothari.com
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– 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:
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:
RBI in its direction has explicitly stated –
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:
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:
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:
-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.
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.
| 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.
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.
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:
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.
‘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.
While lending to related parties, the following principles and provisions are to be followed by NBFCs:
The credit policy of the NBFC must contain specific provisions on lending to RPs. Mandatory contents of such policy will include:
Earlier, the policy requirement was specifically applicable in case of base layer NBFCs, but now the same has been made applicable for all NBFCs.
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.
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.
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.
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.
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 | ||
| 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:
– 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.
| 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/
Simrat Singh | finserv@vinodkothari.com
Asset classification under RBI regulations has always been anchored to the borrower, not to individual loan facilities. Once a borrower shows repayment stress in any exposure, it is no longer reasonable to treat the borrower’s other obligations as unaffected; prudence requires that all other facilities to that borrower reflect the same level of stress. Even the insolvency law reinforces this borrower-level approach to default by allowing CIRP to be triggered irrespective of whether the default is owed to the applicant creditor or not (see Explanation to section 7 of the IBC).
This borrower-level approach is not unique to India. Globally, the Basel framework also defines default at the obligor level – the core idea being that credit stress is a condition of the borrower, not of a single loan. In other words, when a borrower sneezes financial distress, all his loans catch a classification cold.
Under the earlier 2020 framework for priority sector co-lending between banks and NBFCs, each RE applied its own asset classification norms to its respective share of the co-lent loan (see para 13 of 2020 framework). This allowed situations where the same borrower and same loan could be classified differently in the books of the two co-lenders. While operationally convenient, this approach sat uneasily with the borrower-level logic of RBI’s IRACP norms and diluted the consistency of credit risk recognition in a shared exposure.
The 2025 Directions [now subsumed in Para B of the Reserve Bank of India (Non-Banking Financial Companies – Transfer and Distribution of Credit Risk) Directions, 2025] resolve this inconsistency by requiring uniform asset classification across co-lenders at the borrower level (see para 124 reproduced below for reference).
124. NBFCs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA, implying that if either of the REs classifies its exposure to a borrower under CLA as SMA / NPA on account of default in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under CLA. NBFCs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day.
Therefore, where one co-lender classifies its share of a co-lent exposure as SMA or NPA, the other co-lender must apply the same borrower classification to its share of the same exposure. It was an extension of RBI’s long-standing borrower-wise classification principle into a multi-lender structure.
However, the wording of paragraph 124 has, in practice, been interpreted by some lenders in a much narrower manner. The phrase “under the CLA” has been read to mean that the classification of the other co-lender’s share would change only if the borrower defaults on the co-lent exposure itself. On this interpretation, where a borrower defaults on a separate, non-co-lent loan, lenders may in their books follow borrower level classification but they need not share such information with the co-lending partner since there is no default in the co-lent loan.
This approach, however, runs contrary to the regulatory intent and represents a classic case where the literal reading of a provision is placed in conflict with its underlying purpose. Market practice reflects this divergence. Traditional lenders have generally adopted a conservative approach, applying borrower-level classification across exposures irrespective of whether the default arises under the CLA. Certain other lenders, however, have taken a more aggressive position, limiting classification alignment strictly for defaults under the co-lent exposure. The conservative approach is more consistent with RBI’s prudential framework and intent, which has always treated credit stress as a condition of the borrower rather than of a particular loan structure.
Once borrower-level classification is accepted as the governing principle, the consequence is straightforward: any other exposure that a co-lender has to the same borrower must also reflect the borrower’s SMA or NPA status, even if that exposure is not part of the co-lending arrangement. Let us understand this by way of examples.
Scenario 1: Multiple Loans, No Co-Lending Exposure
A borrower has three separate loans:
Although A, B and B may be co-lending partners with each other in general, none of the above loans are under a co-lending arrangement (CLA).
Treatment: Since there is no co-lent exposure to the borrower, paragraph 124 of the Directions does not apply. Each lender classifies and reports its own loan independently, as per its applicable asset classification norms. There is no obligation to share asset-classification information relating to these loans among the lenders.
Scenario 2: One Co-Lent Loan and Other Standalone Loans
A borrower has three loans:
Case A: Default under the Co-Lent Loan
If B classifies its 80% share of L1 as NPA:
Case B: Default under a Non-Co-Lent Loan by any one of the Co-Lenders
If A classifies L2 as NPA:
Case B: Default under a Non-Co-Lent Loan of a Third Lender
Assume L3 is classified as NPA by C, while L1 and L2 remain standard.
Note that borrower-level asset classification and information sharing activates only where there is a co-lending exposure to the borrower. Once such an exposure exists, any default in any loan of a co-lender triggers borrower-level classification across all exposures of that lender, including standalone loans. However, lenders with no co-lending exposure to the borrower remain outside this information-sharing loop. May refer the below chart for more clarity:
Fig 1: Decision chart for asset classification of loans under co-lending
To make borrower-level classification work in practice, the 2025 Directions require co-lenders to put in place information-sharing arrangements. Any SMA or NPA trigger must be shared with the other co-lender promptly and, in any case, by the next working day. It requires aligned IT systems so that both lenders update their books on the borrower at the same time, or as close to real time as possible.
The 2025 Directions reinforce a long-standing regulatory principle: credit stress belongs to the borrower, not to a specific loan or lender. Uniform borrower-level classification and timely information sharing are essential to preserve consistency in risk recognition across co-lenders. While this increases operational complexity, it aligns co-lending practices with RBI’s prudential intent.
See our other resources on co-lending.
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