What changed
The amendment inserts a proviso making Paragraphs 6-8 (Credit Risk Evaluation) applicable only to 'Notified NBFCs'. It deletes Paragraph 3(2) and adds detailed definitions for related party lending, including 'Committee on lending to related parties', 'Contract or arrangement', 'Control', 'Director', 'Entity', 'Key Managerial Personnel', 'Lending', 'Person', 'Personal Loans', 'Promoter', and 'Related Party'. Personal loans are redefined excluding loans for investments in financial assets.
What it means for you
NBFCs must now establish a separate board committee (other than Audit Committee) to sanction related party loans, tightening governance. The expanded definition of 'Related Party' captures more entities, increasing compliance burden. Excluding personal loans for investments in financial assets from the definition may impact product structuring. Notified NBFCs face stricter credit risk evaluation norms.
What you must do
- Form a dedicated 'Committee on lending to related parties' (or designate an existing committee excluding Audit Committee) to approve related party loans.
- Update internal policies to align with the new, broader definitions of 'Related Party', 'Control', and 'Key Managerial Personnel' as per Companies Act, 2013.
- Review and reclassify personal loan products to ensure loans for investments in financial assets are excluded from the 'Personal Loans' definition for these Directions.
- Ensure compliance with the amended provisions for Notified NBFCs regarding Paragraphs 6-8 of the Directions.
- Train credit and compliance teams on the expanded scope of related party transactions and reporting requirements.
Who it affects
All NBFCs governed by RBI's Credit Risk Management Directions, Notified NBFCs specifically, Board of Directors and committees of NBFCs, Credit risk and compliance teams, Related party lending operations
What is the 'Committee on lending to related parties' and who can be on it?
It is a board committee responsible for sanctioning loans to related parties. NBFCs can use an existing committee (other than the Audit Committee) for this purpose. The committee must be formally designated.
How is 'Related Party' defined under the new amendment?
It includes a related person or entities where that person is a partner, manager, KMP, director, promoter, or shareholder with >10% equity, or controls >20% voting rights, or can nominate a director, or is a guarantor, trustee, etc. It also covers subsidiaries, parent, holding, associate, or joint venture of the related person.
Are personal loans affected by this amendment?
Yes. 'Personal Loans' are redefined per Banking Statistics (Harmonised Definitions) but exclude loans for investments in financial assets. This may impact how NBFCs classify and report personal loans under these Directions.