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Directions · Reserve Bank of India

Reserve Bank of India (Local Area Banks – Credit Risk Management) Directions, 2025 (Updated as on July 01, 2026)

UR

The four dates on this rule

At a glanceRBI issues this rulebook so Local Area Banks manage credit risk consistently, since credit risk is one of their biggest risks. These Directions apply only to Local Area Banks, called banks in this document. RBI issued these Directions on November 28, 2025.

Official RBI page

What it says

Opening paragraphs

1. Latest update

RBI Opening paragraphs

The document was last updated on July 1, 2026.

2. Date of issue

RBI Opening paragraphs

RBI issued these Directions on November 28, 2025.

3. Credit risk significance

RBI Opening paragraphs

Local Area Banks face several risks, and credit risk is one of the most significant among them.

4. Purpose

RBI Opening paragraphs

RBI issues this rulebook so Local Area Banks manage credit risk consistently, since credit risk is one of their biggest risks.

Chapter I. Preliminary

1. Start date

RBI Para 2

These Directions started working immediately once RBI issued them.

BankPulse example. There is no gap here between issue and effect. The Directions come into effect immediately upon issuance. A bank cannot wait for a separate start date, because there is none.

2. Who is covered

RBI Para 3

These Directions apply only to Local Area Banks, called banks in this document.

Chapter II. Board Approved Policies

1. Board-approved credit policy

RBI Para 4(2)

A bank's Board must approve a full policy on credit risk management.

Chapter III. Statutory Restrictions

1. Own-share lending ban

RBI Para 6(1)

A bank cannot grant loans or advances against the security of its own shares.

2. No loans to directors

RBI Para 7(1)

A bank cannot commit to granting loans or advances to its own directors or linked firms.

Chapter IIIA. Regulatory Restrictions

1. Related-party materiality cap

RBI Para 16(3)

Loans to related parties need a materiality threshold in the credit policy, capped at 10 lakh rupees.

BankPulse example. The credit policy must set a materiality threshold for loans to related parties. It may not be higher than ₹10 lakh. A policy naming ₹15 lakh would be outside the rule.

2. Board approval threshold

RBI Para 16(3)

Loans above the materiality threshold need approval from the Board or the Committee on Lending to Related Parties.

3. Recusal rule

RBI Para 16(3)

Directors and key staff must recuse themselves from decisions on loans involving themselves or their related parties.

4. Quarterly internal audit

RBI Para 16(3)

Internal auditors must review related-party loans at least once every quarter.

5. Penalties for breach

RBI Para 16(3)

Breaking or dodging these rules can bring monetary penalties, forced provisioning, or forensic audits.

Chapter IV. Unhedged Foreign Currency Exposure (UFCE)

1. Unhedged forex exposure

RBI Para 17

Banks must assess unhedged foreign currency exposure of borrowers and hold extra provisioning and capital against it.

2. 75% EBID trigger

RBI Para 19(3)

Borrowers whose potential forex loss tops 75% of EBID trigger 80 basis points extra provisioning and a higher risk weight.

BankPulse example. A borrower's likely loss on foreign exchange comes to 80 per cent of earnings before interest and depreciation. That is more than 75 per cent. So the bank adds 80 basis points of provisioning and raises the risk weight by 25 percentage points.

Chapter V. Legal Entity Identifier (LEI) for Borrowers

1. LEI code requirement

RBI Para 25

Non-individual borrowers with 5 crore rupees or more exposure must get a Legal Entity Identifier code.

2. No LEI, no loan

RBI Para 26

Borrowers who fail to get an LEI code cannot get a new loan or a renewal.

Chapter VI. Valuation of Properties - Empanelment of Valuers

1. Valuer independence

RBI Para 31(2)

Property valuers must have no direct or indirect interest in the property they value.

2. Dual valuation rule

RBI Para 31(3)

A bank must get at least two independent valuation reports for properties worth 50 crore rupees or more.

Chapter VII. Filing of Security Interest relating to Immovable (other than equitable mortgage), Movable, and Intangible Assets in CERSAI

1. CERSAI filing duty

RBI Para 38

Banks must keep filing every security interest transaction with the CERSAI registry on an ongoing basis.

Chapter VIIA. Maintenance of Cash Credit Accounts, Current Accounts and Overdraft Accounts by Banks

1. Small-exposure current accounts

RBI Para 38(5)

A bank can freely run current or overdraft accounts if banking-system exposure to the customer stays under 10 crore rupees.

BankPulse example. A customer's borrowing across the banking system is ₹6 crore. That is less than ₹10 crore, so any bank may run its current account without restriction. At ₹12 crore the restrictions apply.

2. 10 percent exposure share

RBI Para 38(1)

A lender must hold at least a 10 per cent share of the system's exposure to the borrower.

BankPulse example. A lender must hold at least a 10 per cent share of the system's exposure to that borrower. Suppose the system's exposure is ₹500 crore. Then a share of ₹50 crore meets it, and ₹40 crore does not.

3. Two-day sweep rule

RBI Para 38(1)

Money reaching a collection account must move to the borrower's designated account within two working days.

4. Half-yearly account checks

RBI Para 38(3)

Banks must check compliance on these accounts at least once every half year.

Chapter VIII. Repeal and other provisions

1. Older rules repealed

RBI Para 39

This document repeals all earlier RBI instructions on credit risk management for Local Area Banks.

2. Old actions preserved

RBI Para 40

Anything already done under the repealed rules stays governed by those old provisions.

How this rule has changed

The points above are the rule as it stands today, after every change listed here.

  1. Issued on November 28, 2025. This is the date RBI put the rule out.

  2. Changed on Dec 11, 2025.

    • CC facility flexibility. Banks may grant cash credit limits as per customer need, with no extra limits from this new chapter.
    • Small exposure current accounts. Banks may freely open and run current or overdraft accounts if total banking system exposure is below ₹10 crore.
    • Exposure meaning. Exposure here means total sanctioned fund and non-fund credit limits taken by the borrower from all banks.
    • Non-eligible banks role. A bank that does not meet the share condition may only run collection accounts for that borrower.

  3. Changed on Jan 05, 2026.

    • Board credit policy. Each bank must have a full Board approved policy on credit risk, covering the areas named in this paragraph.
    • Policy must cover parties. The credit risk policy must include rules for loans to related parties, unhedged foreign currency, and property valuation.
    • Board owns party policy. The Board must make sure there are proper systems to apply the bank's lending to related parties policy.
    • Policy for related parties. The bank's credit policy must have clear rules for lending to related parties, as per these Directions.

  4. Changed on Apr 29, 2026.

    • Calamity impact in credit. When you rate a borrower, you must also think how calamities may affect the borrower's ability to pay.
    • Start date. This amendment starts applying from July 1, 2026.

The same subject for other kinds of institution

The same subject for other kinds of institution.

Other RBI rules for local area banks

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