What changed
The amendment inserts several new definitions in Chapter I of the Directions, including 'Contract or arrangement', 'Control', 'Director of a RCB', 'Entity', 'Key Managerial Personnel (KMP)', 'Lending' (in related party context), 'Person', 'Personal Loan', 'Promoter', 'Reciprocally Related Person', and 'Related Party'. These definitions align with the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016, and clarify the scope of related party transactions and lending restrictions.
What it means for you
Rural Co-operative Banks must now identify and monitor related parties more rigorously, including entities where a related person holds more than ten per cent of paid-up equity share capital or controls over 20% voting rights. Lending to such parties is explicitly defined to include both funded and non-funded credit facilities, excluding equity investments. Banks need to update their credit risk policies and internal controls to comply with these expanded definitions, which may increase compliance costs but reduce risk concentration.
What you must do
- Review and update your bank's credit risk management policy to incorporate the new definitions for related parties, KMP, and control.
- Identify all existing and potential related party exposures using the expanded criteria, including entities where related persons have significant influence or control.
- Train credit and compliance teams on the amended definitions and their implications for lending decisions and reporting.
- Ensure that loan documentation and monitoring systems capture related party relationships as per the new definitions.
Who it affects
Rural Co-operative Banks, Credit risk management teams, Compliance officers, Board of directors and KMPs of RCBs
What is the key change in the definition of 'Related Party' for RCBs?
The amendment expands 'Related Party' to include entities where a related person or reciprocally related person holds more than ten per cent of paid-up equity share capital, controls over 20% voting rights, or has the power to nominate a director, among other criteria.