Banks seek dilution of related party norms to avoid frequent board approvals

Banks have approached the RBI with a request to amend the rules governing related-party transactions. They are seeking suitable amendments to avoid seeking the board’s approvals for the disbursement and renewal of loans. Current regulations necessitate board oversight and approval in every case where a bank’s director has a link with the borrower. As per the Banking Regulation Act, 1949, unless sanctioned by the board of directors or management committee, a bank should not lend beyond Rs 5 crore to a company where a ‘relative’ of any of the bank’s directors is on the board of the borrower, or is a partner, guarantor, a major shareholder, or in control of the borrowing company.

Bankers believe that hundreds of loan renewal decisions should not be presented to the board or the board committee if there are no changes to the loan’s tenure, interest rate, or other parameters. Given the frequent instances of cross-directorships and the limited talent pool available at board levels, tracking related party transactions and referring a large number of proposals to the board have become routine. This is seen as contrary to the established principle of restricting a Board’s role to broad policy decisions.