The Reserve Bank of India (RBI)’s decision to revise the guidelines on connected lending may have been prompted by instances of lenders not complying with rules on loans to companies, experts believe.

Bankers said innovative structuring of loans may have resulted in a breach of the regulations. They pointed out that several business houses now run NBFCs (non-banking financial companies), thereby enabling credit to flow from one corporate group to another. The possibility of quid pro quo deals exists with one NBFC lending to another and vice versa, since most NBFCs transact with more than two dozen banks.

A senior official at State Bank of India said currently whenever the bank lends to any corporate group, it scrutinises the level of bank’s transactions with that group — with regard to the nature of transaction, whether they are a related party, is the repayment happening properly, among others. “There are certain transactions we are not aware of because we cannot check every transaction,” the official explained.

A senior official at Union Bank of India said the regulator may have come across loan transactions where the guidelines were being breached and credit disbursed without the risk being considered.

The RBI’s connected lending guidelines are aimed at preventing a conflict of interest in lending operations of financial institutions. For instance, FIs are not permitted to grant loans against the security of its own shares to any of its directors or any firm in which any of its directors is interested as partner, manager, employee or a guarantor. They are also not permitted to lend to any company, or the subsidiary, or the holding company, in which any of their directors is a director, managing agent, manager, employee or guarantor, or in which the person holds substantial interest.

In 2019, the regulator superseded the Punjab and Maharashtra Cooperative (PMC Bank) board as about 70% of its loan book of Rs 8,383 crore was extended to realty firm HDIL. In a more recent event, ICICI Bank was fined Rs 12.19 crore by the RBI in October for sanctioning or committing loans to companies where two of its directors were also directors.