Promoters and Shareholders Will No Longer Be Able to Get Loans from Their Own Banks: RBI Closes the Doors

New Delhi: The Reserve Bank of India (RBI) has introduced stricter regulations for banks regarding loan disbursements. Under the new rules, banks will no longer be able to offer loans to their promoters, major shareholders, or their relatives, as well as to companies that are controlled or significantly influenced by them. These new regulations will come into effect from April 1, 2026.

The primary aim of these changes is to improve governance, transparency, and oversight in banks. While the RBI clarified that shareholding alone will not fall under these new rules, investments made by banks in the debt instruments of these individuals or companies will be covered by the new guidelines.

What’s New?
From now on, banks must implement board-approved policies outlining how they will handle loans to individuals or companies associated with the bank. Additionally, these loans will have prescribed limits. If any unethical or improper loans are being processed, banks will be required to create a system for reporting them. Bank directors, senior officers, and certain key employees, if they or their close relatives have a vested interest, must recuse themselves from the decision-making process related to those loans.

Loan Approval Limits
For loans exceeding certain amounts, prior approval from the board or a special committee will be necessary. The thresholds are set at ₹25 crore for large banks, ₹10 crore for medium-sized banks, and ₹5 crore for small banks. Banks will also be required to maintain an updated list of all individuals and companies associated with them. Compliance with these regulations must be reviewed every three months, and any discrepancies must be reported to the audit committee. Information regarding loans granted to key employees must also be provided annually.

Who Will Be Affected?
Under the new rules, loans cannot be provided to promoters, their relatives, and shareholders owning 10% or more of the bank’s shares. Companies controlled or influenced by these individuals will also be ineligible for loans. However, exceptions may apply if an individual has merely invested in a company without controlling it. Listed banks will need to comply with both the Securities and Exchange Board of India (SEBI) regulations and RBI’s internal loan limits for related parties.

What Happens if the Rules Are Violated?
Loans or transactions that do not comply with these new rules will remain in effect until their term ends. Additionally, the RBI has updated the definition of “related party,” removing the ₹5 crore monetary limit for shareholding. Nominee directors appointed by government agencies at other banks are excluded from this definition, but RBI’s own nominee and independent directors will still be subject to these restrictions.

The legal restrictions on agricultural loans provided to directors of rural cooperative banks will remain unchanged. The RBI has also warned that any violations of these rules or attempts to circumvent them will result in strict action, including penalties, additional provisioning, forensic audits, and even business restrictions.