RBI Proposes Rules For Connected Lending By Banks To Avoid 'Moral Hazard'

The Reserve Bank of India has proposed a unified regulatory framework for banks involved in connected lending to avoid "moral hazard issues", Governor Shaktikanta Das said in the monetary policy statement on Friday.

Connected lending means lending to people who are in a position to control or influence the decision of the lender.

Given that the existing guidelines are limited in scope, the framework would "strengthen the pricing and management of credit by regulated entities," Das said.

A draft circular in this regard will be issued for public comments.

The proposal to review the connected lending framework is positive for the transparency and long-term health of the financial sector, according to Karthik Srinivasan, senior vice president of ICRA Ratings.

"The connected parties may go beyond the common directors or where the managers and their relatives may have relationships with the borrower," Srinivasan said. "Connected lending could also involve lending arrangements among lenders, which may involve moral hazards, such as evergreening of loan exposures."

The move to set up a framework is aimed at bringing uniformity in regulations for all regulated entities, which is currently "scattered", Rajeshwar Rao, deputy governor of the RBI, said in a post-policy press conference.

In a separate move, the central bank has decided to bring loan aggregation services under a regulatory framework, which will enable borrowers to compare and choose the best available option to avail loan from one of the available lenders, the RBI said.

"The framework will focus on enhancing the transparency in the operations of WALPs (web aggregator loan products), increase customer centricity, and enable the borrowers to make informed choices," Das said.

The proposal comes after the central bank observed some concerns about loan products harming customers' interests.

The RBI also proposed to set up a fintech repository to oversee the lending practices by banks and non-banking financial companies, in partnership with fintech platforms.

A fintech repository will be operationalised by the Reserve Bank Innovation Hub in April 2024 or earlier. Fintech companies would be encouraged to provide relevant information voluntarily to this repository, the governor said.