RBI Tightens Related Party Rules: Implications for NBFCs and the Lending Ecosystem

The Reserve Bank of India released a new draft framework on October 3, 2025 that aims to bring stronger transparency and governance to related party lending by regulated entities (REs). Effective April 1, 2026, the rules follow a common principle-based approach across the ecosystem.

For NBFCs, these proposed directions are among the most significant changes to governance in recent years. They come at a time when the sector is expanding, raising capital from diverse sources and playing a larger role in retail and MSME credit.

Related party lending has always been a sensitive area. When a lender extends credit to entities connected to promoters, directors or key managers, there is a risk that commercial judgement may be influenced. RBI’s draft rules are designed to remove these risks and help build a safer and more predictable financial system.

Why RBI Is Tightening the Rules Now

The new draft framework comes in the backdrop of several changes in the NBFC landscape. Many mid-sized NBFCs have grown fast over the last three years. Several new players have entered the market with strong promoter networks. Some NBFCs also have complex group structures with shared ownership patterns, common directors or cross guarantees.

RBI has also been increasing its supervisory focus after a few governance lapses in earlier years. Globally, regulators are moving toward stronger connected lending norms. The goal is to ensure that businesses do not rely on circular financing or non-arm’s-length transactions that distort true risk.

The timing of the draft rules should be seen along with the broader shift toward risk-based supervision. Indian NBFCs are now expected to operate with stronger disclosure, tighter risk management and more transparent reporting. The draft directions reflect this larger direction.

What RBI Has Proposed: A Quick Overview

The draft directions overhaul how NBFCs identify, approve and monitor related party transactions. The major proposals include:

1. Wider definitions of related persons and related parties

2. Mandatory Board or Board Committee approval for large exposures

3. Recusal rules for directors and key managers

4. Stronger requirements on internal controls and audit

5. Semi-annual reporting to RBI through DAKSH

6. Detailed disclosures in financial statements

7. A one-year run-off period for non-compliant legacy loans

8. Penalties for violations, including full provisioning and forensic audits

The intent is to create a consistent governance framework for all NBFCs, from base layer institutions to top layer entities.

Summary of Regulatory Changes

Key Regulatory Changes Explained

1. Expanded Definitions to Close Loopholes

The definitions of both “related person” and “related party” have been broadened. This is intended to close all possible gaps through which connected lending can occur.

A "Related Person" now includes:

• Promoters, Directors, or Key Managerial Personnel (KMPs).

• Shareholders with more than 5% equity or voting rights (a significant reduction from previous limits).

• Individuals/entities that can nominate a director to the NBFC's Board.

• Group entities that can influence the NBFC.

• Relatives of any of the above individuals.

An entity is considered a "Related Party" if a "Related Person" or their relative is involved in the entity as:

• Management/Influence: A director, promoter, or manager of the entity.

• Significant Ownership: Holds more than 10% equity or at least ₹5 crores of equity, or has control/voting rights above 20%.

• Financial Linkages: A guarantor or surety for the entity's debt.

• Trust Structure: A trustee, beneficiary, or author of a private trust.

• Group Structure: A parent, subsidiary, associate, or joint venture of the NBFC itself.

• Catch-All Clause: It is an entity accustomed to acting on the advice, direction, or instruction of a Related Person (The RBI's crucial provision for capturing shadow control).

This expanded definition is one of the most important features of the draft rules.

2. Materiality Thresholds for Sanction Approvals

RBI has mandated that all significant related party loans must be approved at the highest level. Smaller loans can be approved by designated authorities, but large exposures need Board or Board Committee oversight. For banks, approval thresholds are linked to their asset size and statutory requirements, while for NBFCs, it’s as per below:

Two categories of loans are excluded. These are secured loans against government securities, fixed deposits or insurance policies, and routine personal loans to employee directors that follow internal rules. Additionally, government-owned entities are exempt if the relationship exists solely due to common government ownership.

3. Governance and Control Enhancements

The draft rules place stronger responsibility on NBFC Boards. Each NBFC must now include a separate section on related party lending in its credit policy. This policy must include:

• Clear sub limits within the overall exposure limit

• Provisions on lending to senior officers and their relatives

• A whistleblowing channel for internal reporting

• A clear ban on reciprocal lending arrangements or quid pro quo structures

Directors or KMP with any interest in a related party loan must recuse themselves from all discussions or decisions on that loan. This includes sanction, disbursal, restructuring and enforcement actions.

4. Monitoring, Audit and MIS Requirements

NBFCs must maintain an updated list of related persons and related parties. Internal audits must check compliance at least every quarter. Any deviation must be reported to the Audit Committee of the Board.

Auditors must also review all exposures to group entities. They are required to verify that the internal processes and documentation meet the standards laid down in the draft directions.

5. Disclosure and Reporting Requirements

The draft rules mandate extensive reporting to RBI and public disclosure.

NBFCs must report related party loans and related contracts on a semi-annual basis through the DAKSH platform. They must also disclose the following in their financial statements for the past two years:

• Total outstanding related party loans

• Share of related party loans in total credit exposure

• SMA and NPA classification of related party loans

• Provisions held against such loans

• Top ten related party exposures, including non-fund-based facilities, investments and derivative values

6. Treatment of Legacy Loans

Existing loans that do not meet the new guidelines must be allowed to run off. NBFCs will not be allowed to renew or enhance these loans unless they comply with the new rules. The run-off period is either their maturity or one year after the final notification.

This gives NBFCs enough time to adjust their books and transition smoothly.

Implications for NBFCs

The draft rules will have wide operational and strategic implications.

1. Stronger Governance Expectations

NBFCs will need to strengthen Board oversight, ensure independence of credit decisions and raise the role of internal governance functions. Independent directors will play a more influential role in the coming years.

Crucially, the RBI has explicitly listed 'staff accountability exercises' as a potential penalty, meaning individual employees could face direct scrutiny for lapses.

2. Higher Operational and Compliance Workload

NBFCs will need to improve their data systems, strengthen audit trails and maintain clear documentation. Staff will need training on how to identify related parties and how to escalate conflicts of interest.

3. Impact on Balance Sheets

Some NBFCs with significant group exposures may need to adjust their portfolios. While this may create short term pressure, it will improve credit quality and build investor confidence in the long term.

4. Investor and Market Implications

The new rules will improve transparency and reduce the risk of hidden exposures. This may help NBFCs access capital at better terms as investor trust increases.

Technology and Infrastructure Readiness Needs

The shift in governance expectations means NBFCs will need stronger internal systems. Manual processes will not be enough to meet the requirements on monitoring, approvals and reports.

NBFCs will need systems that can:

• Identify related persons and entities at onboarding

• Track exposure limits across group entities in real time

• Automatically route high value related party loans to Board or Committee

• Create audit trails for all key decisions

• Produce DAKSH-ready MIS reports

• Prevent renewals of non-compliant loans

• Provide clear dashboards for SMA and NPA trends

A modern workflow-driven platform will help NBFCs reduce compliance risk without slowing down operations.

How OneFin Can Help

OneFin offers an integrated lending infrastructure that is aligned with the needs created by the draft rules. Its benefits include:

• A policy-driven origination layer that embeds approval rules

• Automated routing of high threshold proposals

• Configurable risk and compliance checks

• Strong audit trails for every action

• MIS and reporting modules that can adapt to RBI formats

• A scalable architecture that supports rapid regulatory changes

These features allow NBFCs to achieve compliance while maintaining speed and control across the lending lifecycle.

Conclusion

RBI’s Draft Directions for lending to related parties mark a major shift toward stronger governance in the NBFC sector. These rules aim to reduce conflicts of interest, improve transparency and protect the financial system from concentrated risks. With the right systems and processes, NBFCs can turn this regulatory upgrade into an opportunity for long term strength and resilience.

OneFin is well positioned to support lenders during this transition. Its modular and scalable platform helps institutions adopt smart controls, maintain compliance and grow with confidence.

To know more about OneFin, schedule a Demo.