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<\/p>\nThe decision by the Reserve Bank of India to introduce a unified regulatory framework on connected lending for all the regulated entities (RE) is expected to reduce the influence of business conglomerates in the Indian lending space, said bankers and experts.<\/p>\n
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“Connected lending pertains to lending to related parties within the same business group.<\/p>\n
“While the RBI might appear more agreeable to allowing business conglomerates to own banking licenses, it deems it crucial to bolster regulations that would prevent conglomerate-owned banks from gaming the system,” said Shivaji Thapliyal, head of research and lead analyst, YES Securities.<\/p>\n
The RBI, during its monetary policy announcement on December 7, stated that the framework aims to reduce the influence of individuals who can control or influence a lender’s decision.<\/p>\n
Connected lending, or lending to such individuals, can be a matter of concern if the lender does not maintain an arm’s length relationship with these borrowers.<\/p>\n
Their involvement can compromise the pricing and credit management of the lending entities.<\/p>\n
“Right now, the regulations vary between the regulated entities.<\/p>\n
“There are scattered provisions.<\/p>\n
“In order to bring about uniformity in the process of these regulations, we are coming up with some draft guidelines which will help clarify the position and have a uniformity in the regulatory approach to connected lending amongst all regulated entities,” said deputy governor Rajeshwar Rao during the post-policy press meet.<\/p>\n
According to industry experts, the term “Regulated Entities” not only includes banks but is also expected to encompass other lending agencies like non-banking financial companies (NBFCs) and cooperative banks.<\/p>\n
“Many Indian companies have a lending side through NBFCs.<\/p>\n
“They claim that there is a Chinese wall, meaning that one department’s information is not passed on to the other department.<\/p>\n
“But at the top level, it doesn’t work like that. They are aware of the decisions different verticals are taking.<\/p>\n
“So, that could be one of the reasons for the RBI’s decision,” said a senior executive with a public sector bank.<\/p>\n
Most top-tier NBFCs in the country, including L&T Finance, Bajaj Finance, Aditya Birla Capital, Piramal Capital, and Housing Finance, Mahindra & Mahindra Financial Services, among others, are owned by some of the top business houses in the country.<\/p>\n
The upper layer includes NBFCs specifically identified by the RBI as warranting enhanced regulatory requirements based on a set of parameters and scoring methodology.<\/p>\n
In November 2021, the RBI permitted an increase in promoter’s stakes from 15 per cent to 26 per cent in banks.<\/p>\n
Earlier this year, the central bank gave an in-principle and conditional approval to IndusInd International Holdings, owned by Hinduja Group, to raise its stake in IndusInd Bank to 26 per cent.<\/p>\n
Experts also point to a surge in cases of lapse in corporate governance among the cooperative banks, which is a cause for concern.<\/p>\n
The central bank’s decision is expected to bring increased uniformity, transparency, and improved risk management across these lending bodies.<\/p>\n
Vivek Iyer, partner at Grant Thornton Bharat, said: “One of the most important aspects of governance in the area of credit within financial services is the need to have strong underwriting standards without any bias.<\/p>\n
“Connected lending has the potential to compromise this independence.<\/p>\n
“Hence, the regulator felt that there was a need to explicitly consolidate and lay down a clear framework for connected lending, which is essentially related party lending.”<\/p>\n
A senior banking executive said: “It is essential to clarify regulations thoroughly to avoid ambiguity.<\/p>\n
“A robust and explicit framework is necessary to avoid any room for misappropriation.<\/p>\n
“It appears that RBI’s focus is to enhance explicit guidelines for specific interest of the director in companies that banks or NBFCs aim to engage with in lending relationships.<\/p>\n
“The intention seems to be to ensure transparency, especially in cases where directors or their close relatives might wield influence.”<\/p>\n
“There’s an anticipation of more detailed regulations to address potential confusion among regulatory bodies about what constitutes connected lending.<\/p>\n
“The practice within our organisation involves extreme caution regarding any connection, whether it involves equity, influence, or indirect control.<\/p>\n
“Such a connection is discussed, disclosed, and usually brought before the board for approval when necessary,” the executive added.<\/p>\n
The central bank decided to form a unified framework because “the extant guidelines on the issue are limited in scope and are not applicable uniformly to all regulated entities”.<\/p>\n
The RBI will release a circular on the same.<\/p>\n