What changed
The amendment inserts 12 new definitions and replaces one definition in Chapter I, including 'Related Party', 'Reciprocally Related Person', 'Control', 'Promoter', 'KMP', and 'Lending' in the context of related parties. It also clarifies that 'Director of a UCB' includes nominee director, independent director, and BoM members, and 'Personal Loan' is defined per Banking Statistics harmonised definitions.
What it means for you
UCBs must now identify and monitor credit exposures to a broader set of related parties, including reciprocally related persons and entities where related persons have control or significant influence. This will require enhanced due diligence, updated credit policies, and stricter reporting to avoid regulatory breaches. Lenders should expect increased compliance costs and potential restrictions on lending to connected entities.
What you must do
- Review and update your UCB's credit risk management policy to incorporate the new definitions of related party, reciprocally related person, and control.
- Train credit and compliance teams on identifying related parties and reciprocally related persons as per the amended directions.
- Enhance monitoring systems to track all funded and non-funded credit facilities to related parties, including debt investments but excluding equity.
- Ensure board-approved definitions and processes align with the Companies Act, 2013 and IBC, 2016 references for control, promoter, and person.
- Prepare for potential regulatory scrutiny by conducting a gap analysis of current related party lending practices against the new framework.
Who it affects
Urban Co-operative Banks (UCBs), Credit risk management teams at UCBs, Compliance officers and board members of UCBs, Auditors and regulators overseeing UCBs
What is a 'Reciprocally Related Person' under the new directions?
It means an individual who is a director (excluding independent/nominee directors appointed by government, RBI, or statutory body) or BoM member of another co-operative bank, or their relatives, or firms/companies where such directors/BoM members have interest or substantial interest.
Does 'Lending' to related parties include equity investments?
No. The definition of 'Lending' in the context of related parties covers funded and non-funded credit facilities and investments in debt instruments, but explicitly excludes equity investments.
Who is considered a 'Key Managerial Personnel' (KMP) for a UCB?
KMP includes all employees one level below the Board and any person designated as such by the Board. This is a new definition inserted to clarify the scope of related party relationships.