Introduction to the New Credit Risk Paradigm

On January 05, 2026, the Reserve Bank of India (RBI) introduced a pivotal shift in the governance landscape for All India Financial Institutions (AIFIs). Through the issuance of the Reserve Bank of India (All India Financial Institutions – Credit Risk Management) – Amendment Directions, 2026, the central regulator has fundamentally restructured the protocols surrounding credit risk, specifically targeting the sensitive area of related party transactions.

Exercising its powers under Section 45L of the Reserve Bank of India Act, 1934, the RBI has moved away from the previous "Connected Lending" framework, replacing it with a more rigorous, definition-heavy "Related Party" regime. This transition aligns the banking regulatory framework more closely with the Companies Act, 2013 and the Insolvency and Bankruptcy Code (IBC), 2016.

The primary objective of these amendments is to mitigate conflicts of interest, prevent circular lending, and ensure that credit decisions are made on purely commercial terms rather than through influence or relationships. These Directions are slated to become fully operational from April 1, 2026, giving AIFIs a transitional window to realign their internal policies and Board structures.

Chapter I: Redefining the Scope and Terminology

The backbone of the 2026 Amendment lies in its expanded definitions. The RBI has cast a wide net to ensure that no party capable of influencing the AIFI’s credit decisions slips through the regulatory cracks.

The amendment introduces a nuanced distinction between a "Related Person" and a "Related Party."

A 'Related Person' with respect to an AIFI is defined as any person (and their relatives) who:

  • Holds the position of a promoter, director, or Key Managerial Personnel (KMP).
  • Owns more than 5% of the paid-up equity share capital or exercises more than 5% of voting rights (whether singly or jointly).
  • Possesses the authority to nominate a director to the Board via an agreement.
  • Exercises control over the AIFI, either singly or jointly.

Building upon this, the term 'Related Party' is broader. It encompasses the Related Person, a Reciprocally Related Person, and various entities linked to them. For instance, if a Related Person is a partner, manager, or director in another entity, that entity becomes a Related Party to the AIFI. This extends to scenarios where the Related Person holds more than 10% shareholding, exercises control, or provides guarantees.

To curb quid pro quo arrangements—where Bank A lends to Bank B’s director in exchange for a similar favor—the RBI has introduced the concept of a 'Reciprocally Related Person'.