The Reserve Bank of India (RBI) on Friday said it will come out with a framework for connected lending with a view to strengthen the management of credit by banks and other lenders.
Connected lending is providing finance to persons who are in a position to control or influence the decision of a lender.
These could include directors in a bank or a corporate entity holding a stake in a particular lender. It is therefore expected that the proposed norms will look to curb or restrict the influence of such persons.
"The extant guidelines on connected lending are limited in scope. It has been decided to come out with a unified regulatory framework on connected lending for all regulated entities of the Reserve Bank. This will further strengthen the pricing and management of credit by regulated entities’’, RBI governor Shaktikanta Das said in a televised address after the monetary policy committee (MPC) retained the policy repo rate at 6.5 per cent for the fifth consecutive time.
According to the banking regulator, connected lending can be of concern, if the bank or lender does not maintain an arm’s length relationship with such borrowers.
Moreover, such lending can involve moral hazard issues leading to compromise in pricing and credit management.
RBI added that the current guidelines on connected lending is not applicable uniformly to all regulated entities.
Therefore it will come out with a unified regulatory framework on connected lending for all the entities.