RBI to come up with unified regulatory framework on connected lending
Mumbai, Dec 8, 2023
The central bank believes that the decision to set up a regulatory body will strengthen the pricing and risk management of credit by these entities
The Reserve Bank of India (RBI) on Friday announced that it will set up a unified regulatory framework to regulate entities involved in connected lending. The intention is to curb the influence of people who are in a position to control or influence the decision of a lender. A draft circular will be issued for public comments.
Connected lending or lending to persons who are in a position to control or influence the decision of a lender can be of concern if the lender does not maintain an arm’s length relationship with such borrowers.
The central bank believes that the decision to set up a regulatory body will strengthen the pricing and risk management of credit by these entities.
During the announcement of the Monetary Policy decision, the RBI said that “the extant guidelines on the issue are limited in scope and are not applicable uniformly to all regulated entities. It has been decided to come out with a unified regulatory framework on connected lending for all regulated entities of the Reserve Bank.”
Recently, the RBI has been imposing monetary penalties on lenders for committing loans to companies where the key managerial personnel (KMP) of the lending entities held top positions in the borrowing companies as well.
“The connected parties may go beyond the common directors or where the managers and their relatives may have relationships with the borrower. Further, connected lending could also involve lending arrangements among lenders which may involve moral hazards, such as evergreening of loan exposures. Hence, the proposal to review the connected lending framework is positive for the transparency and long-term health of the financial sector,” said Karthik Srinivasan, Senior Vice President, Group Head - Financial Sector Ratings, ICRA.
“We also welcome a unified regulatory framework on connected lending for all regulated entities, which will bring transparency and increased trust in digital lending, boosting the sector’s growth while protecting borrowers’ interests,” Madhusudan Sharma, Executive Director, Bharat Housing Network, a housing credit platform and infrastructure for affordable housing, stated.
[Business Standard]
