RBI asks banks to draw up credit risk management policy, covering aspects such as lending to related parties

The Reserve Bank of India (RBI) has mandated that scheduled commercial banks (SCBs) develop Board-approved credit risk management policies addressing lending to related parties, country risk management, unhedged foreign currency exposures, and other critical areas.

For lending to related parties, banks must define aggregate limits within materiality thresholds, establish a dedicated ‘Committee on Lending to Related Parties’, and implement comprehensive whistleblower mechanisms.

Under the Reserve Bank of India (Commercial Banks – Credit Risk Management) Amendment Directions, 2026, permissible loans to related parties (including fully cash-secured facilities adhering to prescribed LTV/valuation norms) must not exceed materiality threshold ceilings.

Materiality thresholds vary by institution size: Banks below ₹1 lakh crore in assets face a ₹5 crore limit; those with ₹1 lakh crore to ₹10 lakh crore in assets have a ₹10 crore ceiling; and institutions exceeding ₹10 lakh crore in assets are subject to a ₹25 crore threshold.

Loan approvals above defined thresholds require authorization from either the bank’s Board or its related-party lending committee. Smaller loans below materiality limits may be approved by designated authorities per delegated powers.

Deliberation Recusal Requirements

Directors, Key Managerial Personnel (KMP), and specified employees must abstain from discussions or decisions involving loan proposals, contracts, or arrangements concerning themselves or their related parties.

This recusal obligation extends to subsequent material modifications of loan terms, including settlements, write-offs, security enforcement actions, and resolution plan implementations.

Financial institutions must implement systematic processes to maintain and regularly update registers documenting all related persons/parties and corresponding credit facilities extended by the bank.

Whistleblower Protection System

The credit risk policy must incorporate whistleblower protections enabling confidential reporting of concerns regarding irregular or unethical related-party lending practices without fear of retaliation, while eliminating potential quid pro quo arrangements.

These regulatory updates—which also address property valuation standards (including valuer empanelment) and current account/CC/OD opening procedures—take effect from April 1, 2026. Banks retain the option to implement the revised directives fully before the effective date.

Published on January 5, 2026