RBI specifies ‘Related Party’ with respect to banks

RBI specifies ‘Related Party’ with respect to bank

RBI has issued RBI Credit Risk Management Directions, 2025 defining ‘Related Party’ with respect to a bank to mean a related person, a reciprocally related person, or any of the specified entities

Banks, in the course of financial intermediation, are exposed to various financial and non-financial risks, of which credit risk is the one of the most significant risks. If not managed effectively, credit risk may have ramifications for a range of other risk categories too. As credit exposures of Banks encompass varied sectors, borrower types and products with their own idiosyncratic complexities as well as systemic implications due to interconnectedness among themselves, credit risk management of Banks involve a range of prudential tools, including statutory and regulatory restrictions / prohibitions on certain activities.

Recognising this, the Reserve Bank has, from time to time, issued guidelines to strengthen credit risk management practices. The Reserve Bank of India Credit Risk Management Directions, 2025 is one of such directions which was issued in 28/11/2025.

These directions provide that A bank shall put in place a comprehensive Board approved policy on Credit Risk Management. The policy shall, inter alia, cover aspects related to lending to related parties, country risk management, unhedged foreign currency exposures, valuation of properties including empanelment of valuers, and opening of current accounts and CC / OD accounts.

Related Party’ with respect to a bank shall mean a related person, a reciprocally related person, or any of the following entities:

a. where a related person or a reciprocally related person is a partner, manager, KMP, director or a promoter; or

b. where a related person or a reciprocally related person is a shareholder with more than ten per cent of paid-up equity share capital; or

c. where a related person or a reciprocally related person is having control, whether singly or jointly with another person; or

d. where a related person or a reciprocally related person controls more than twenty per cent of voting rights on account of ownership or through a voting agreement or through any other arrangement; or

e. where a related person or a reciprocally related person has the power to nominate a director to its Board; or

f. which is accustomed to act on the advice, direction, or instruction of a related person or reciprocally related person; or

g. where a related person or a reciprocally related person is a guarantor or a surety; or

h. where a related person or a reciprocally related person is a trustee or an author or a beneficiary and where the entity is in the form of a private trust.

i. which is related to the related person or a reciprocally related person as a subsidiary or a parent company or a holding company or an associate or a joint venture.

Provided that nothing in sub-clause (e) above shall apply in cases where the authority to nominate a director arises exclusively from a lending or financing arrangement.

Provided further that, nothing in sub-clause (f) above shall apply to the advice, directions or instructions given in a professional capacity.

Provided further that, Government of India / State Government-owned or controlled entities shall not be treated as related parties to a government-owned bank just by virtue of the fact that the Government has the common ownership or control of such entities.

‘Related Person’ with respect to a bank shall mean a person, and the relatives of such a person, where the person:

a. is either a promoter, or a director, or a KMP of the bank; or

b. owns more than five per cent of paid-up equity share capital of the bank or can, either singly or jointly, exercise more than five per cent of the voting rights of the bank on account of either ownership or voting agreement or through shareholders’ agreement or through any other arrangement; or

c. can, through an agreement with the bank, nominate a director to its Board; or

d. is either singly or jointly, in control of the bank

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