From Restrictions To Governance: RBI’s Overhaul Of Related Party Lending For NBFCs And SFBs
- IJLLR Journal
- Jan 31
- 2 min read
Sanskar Jaiswal, B.A.LL.B. (Hons.), Gujarat National Law University, Gandhinagar
ABSTRACT
This article examines the Reserve Bank of India’s January 2026 overhaul of the related party lending framework for Non-Banking Financial Companies and Small Finance Banks. It analyses the shift from fragmented restrictions to a governance-driven, board-centric regime and assesses its implications for institutional behaviour, credit discipline, and regulatory oversight.
Introduction
Related party lending has long been a sensitive fault line in financial regulation. Although lending money to individuals and organizations that are related to each other is not inherently illegal, it is associated with the inherent risk of conflict of interests, favouritism, misappropriation of funds, and the loss of credit discipline. With the growth in the size and sophistication of the Indian financial system, especially in the non-banking financial company (“NBFCs”) and the Small Finance Banks (“SFCs”) segments of the industry, the Reserve Bank of India (“RBI”) has paid growing attention to governance failures due to related lending.
It is against this context that the RBI on January 05, 2026, in its notifications has implemented far-reaching modifications to the Credit Risk Management Directions which pertains to NBFCs (here) and to SFBs (here). These amendments do not simply improve on restrictions that exist. They restore the regulation regime that covers related party lending and overturn the fragmented prohibitions into a board-based regime of governance. The fact that the changes were similar in NBFCs and SFBs is an indication of the RBI trying to harmonise the supervisory expectations among the regulated parties.
A Unified Regulatory Framework Across NBFCs and SFBs
The notable aspect of the changes of January 2026 is that the RBI has assumed the similarity of regulatory philosophy of NBFCs and SFBs. Regardless of the institutional structure and statutory treatment, the RBI has shifted to a template in terms of governance in mitigating the risks that are linked to related party transaction.
