RBI to come up with unified regulatory framework on connected lending

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

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The Reserve Bank of India (RBI) on Friday announced it would set up a unified regulatory framework to regulate entities involved in connected lending. The move will help curb the influence of people who are in a position to control or influence the decision of a lender.

A draft circular will soon be issued for public comments.

Connected lending or lending to people 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 with such borrowers.

The central bank believes 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: “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 RBI.”

The RBI has been imposing monetary penalties on lenders for committing loans to companies where the key managerial personnel 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.

Madhusudan Sharma, executive director of housing credit platform Bharat Housing Network, welcomed the decision, saying this would bring transparency and increased trust in digital lending.