At the fifth Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), the Governor Shaktikanta Das on Friday made an important announcement on the ‘Connected Lending’.
For the last MPC meet of the Calendar Year 2023, the central bank has announced to come up with a framework on connected lending which has raised many questions.
Connected lending can involve moral hazard issues leading to compromise in pricing and credit management, the Governor has highlighted.
He said the extant guidelines on the issue are limited in scope and are not applicable uniformly to all regulated entities.
“It has accordingly been decided to come out with a unified regulatory framework on connected lending for all the regulated entities of the Reserve Bank. A draft circular in this regard will be issued for public comments,” he added.
As per the RBI’s definition, connected lending or lending to persons who are in a position to control or influence the decision of a lender can be of concern, if the lender does not maintain an arm’s length relationship with such borrowers.
RBI Governor in the post-MPC press conference on the question of connected lending has said that these are the precautionary measures that we have taken, our efforts is to always act proactively, before the ‘bubble bursts’.
Replying to the same, Deputy Governor M Rajeshwar Rao said there is a confusion between interconnectedness and connected lending. When we talk about the later, it is essentially about the persons who are in a position to control or influence the decision of a lender. The guidelines is in the same context, he explained.
“Right now, the regulations vary between the Regulated Entities and there are scattered provisions. So, in order to bring uniformity in the process of these regulations, we are coming up with draft guidelines which will help to clarify the position, and have uniformity in the regulatory approach to the connected lending amongst all regulated entities,” he added.
The RBI MPC has announced to keep the policy rate unchanged at 6.5% for the fifth monetary policy of the financial year 2023-24.
“As 2023 comes to an end and the new year is about to begin, the long awaited normality still eludes global economy. Major central banks have kept rates on hold as the financial markets remain volatile. Against this unsettled global environment the Indian economy posts a resilient picture,” the governor said.
MPC decided to focus on withdrawal of accommodation to ensure that inflation progressively aligns to the target as supporting growth, the governor said.
Also Read: RBI Monetary Policy: Rate unchaged at 6.5%, FY24 GDP growth at 7%, inflation 5.4%
