At the fifth Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), Governor Shaktikanta Das on Friday made an important announcement on the ‘Connected Lending’.
For the last MPC meeting of the Calendar Year 2023, the central bank announced to come up with a framework on connected lending, which raised many questions.
Connected lending can involve moral hazard problems leading to compromise in pricing and credit management, the Governor emphasized.
He said the existing guidelines on the matter are limited in scope and cannot be applied uniformly to all regulated entities.
“It has therefore been decided to come out with a unified regulatory framework on connected lending for all Reserve Bank regulated entities. A draft circular in this regard will be issued for public comments,” he added.
As per the RBI’s definition, tied lending or lending to persons who can control or influence the decision of a lender may 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 said that these are the precautionary measures we have taken, our efforts are always to act proactively, before the ‘burst of the bubble’.
Responding to the same, Lieutenant Governor M Rajeshwar Rao said that there is confusion between interconnection and connection lending. When we talk about the latter, it is essentially about the people who are able to control or influence the decision of a lender. The guidelines are 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 that will help clarify the position, and have uniformity in the regulatory approach to the connected lending among 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 normalcy still eludes the global economy. Major central banks have kept rates unchanged while the financial markets remain volatile. Against this uneasy global environment the Indian economy is posting a resilient image,” the governor said.
MPC has decided to focus on withdrawal of accommodation to ensure that inflation gradually joins the target as supporting growth, the governor said.
Also Read: RBI Monetary Policy: Rate unchanged at 6.5%, FY24 GDP growth at 7%, inflation 5.4%