RBI promises new framework to curb undue influence in bank lending

The Reserve Bank of India (RBI) will soon come out with a unified regulatory framework to regulate connected lending for the entities it regulates. In essence, the move is aimed at regulating and curbing any undue influence a persons connected with a bank or lender, like those a director or key managerial personnel (KMP) of the lender might be able to exert on the terms or quantum of loans granted to entities related or connected to that person.

“The extant guidelines on the issue are limited in scope and are not applicable uniformly to all regulated entities,” RBI Governor Shaktikanta Das said as he announced the central bank’s monetary policy following a 2-day meeting of its Monetary Policy Committee.

Governor Das added, “It has been decided to come out with a unified regulatory framework on connected lending for all regulated entities of the Reserve Bank. Connected lending or lending to persons who are in a position to control or influence the decision of a lender can be of concern, if the lender does not maintain an arm’s length relationship with such borrowers… This will further strengthen the pricing and management of credit by regulated entities.”

A draft circular on this regulatory framework will be issued in the next few days.

The RBI has been trying to align rules governing NBFCs and other lending entities with the rules governing banks, in areas like compliance, provisioning rules, appointment of a Chief Risk Officer etc.

The matter of “connected lending” has been a constant concern for the RBI and this is why it has been consistently against granting banking licences to corporate entities. The fear is that corporate entities with such a licence might misuse the power to grant loans by offering group companies, related parties, affiliated entities, or friends and family favourable terms on loans or credit lines.

Governor Das also clarified that connected lending has nothing to do with interconncted lending, or the manner in which banks lend to non-banking finance companies (NBFCs).