Bank credit-risk management: appraisal, related parties, UFCE and accounts
The current Credit Risk Management Direction combines borrower assessment, related-party restrictions, foreign-currency exposure, legal-entity identification, property valuation and transaction-account controls. Its April and October 2026 changes must be distinguished from deleted instructions.
Finin2min · Updated 26 October 2026
Rules, scope and practical implications
Independent appraisal remains the bank’s responsibility
The defined commercial-bank scope excludes Small Finance Banks, Payments Banks and Local Area Banks. A Board-approved policy covers credit risk, related parties, countries, unhedged foreign-currency exposure, valuations and transaction accounts. The bank performs its own objective appraisal rather than adopting a consultant’s conclusion. Infrastructure appraisal includes delay/cost-overrun sensitivity; parent debt cannot be disguised as equity of its subsidiary/SPV. Borrower reports, collateral and an approval minute are inputs rather than substitutes for repayment-capacity and end-use assessment.
Related-party status is broader than an accounting disclosure
The April 2026 chapter defines related persons, reciprocally related persons and connected entities for lending. Covered lending includes funded/non-funded credit and debt investment; equity is excluded from that lending definition but can still be prohibited separately. Specified promoter/director/KMP/relative relationships, more-than-5% holders and control/nomination links matter. Reciprocal-bank/fund relationships and entity equity/voting/guarantee links have detailed thresholds and exceptions; common Government ownership alone does not create the stated relationship.
Approval cannot legalise a prohibited related exposure
The own-share and director-connected statutory restrictions apply first. Paragraphs 42G–42H add the specified family, promoter, at-least-10%-shareholder and controlled/significant-influence-entity restrictions. The independently earning spouse and non-strategic financial-holder exceptions are conditional. Remission of specified director-connected debt needs prior RBI approval. A facility predating a directorship is not a licence for unrestricted renewal, enhancement or variation.
Materiality determines the permitted-loan approval route
For otherwise permitted covered transactions, the policy’s individual-transaction materiality ceiling cannot exceed ₹25 crore for bank assets above ₹10 lakh crore, ₹10 crore for assets from ₹1 lakh crore to ₹10 lakh crore, and ₹5 crore below ₹1 lakh crore, using the last audited size. The bank may set lower limits and the stated cash/security/interbank exceptions require their conditions. Above the relevant threshold, the Board or proper lending-to-related-parties committee acts; the Audit Committee cannot perform that sanctioning role. Recusal continues through variations, waivers, settlements, write-offs and enforcement, with quarterly internal-audit review and deviation reporting.
Country risk has monitoring and event-driven escalation
A documented framework covers funded/non-funded and qualifying indirect country exposure, stress and contingency/exit plans. The specified internal assessment requirements apply where net funded exposure to a country is at least 1% of total assets. Review ratings at least annually and sooner after major events. October 2026 provisions allow the identified reviews to the Board or RMC; significant deterioration goes to the next meeting rather than waiting for a routine cycle. Concentration-risk country limits are an additional test.
UFCE needs the correct cash-flow, hedge and earnings data
Ascertain foreign-currency exposure at least annually over the relevant five-year cash-flow/maturity horizon; obtain unhedged data quarterly and the prescribed annual statutory-auditor certification. Only defined natural/financial hedges count. Estimate potential loss using the prescribed FEDAI ten-year maximum annual USD–INR volatility and compare it with the applicable four-quarter EBID. Do not silently use turnover or EBITDA in place of the defined EBID, or assume any foreign-currency income offsets every maturity.
UFCE provision and capital additions use different units
The current potential-loss/EBID bands add 0, 20, 40, 60 or 80 basis points of provision. Above 75%, the risk-weight increase is 25 percentage points: 50% becomes 75%, not 62.5%. At exactly 75%, the up-to-75% bucket has the stated 60-basis-point addition without that uplift. Recompute at least quarterly on the separately prescribed exposure bases. Missing sufficient information normally invokes the last bucket. The permitted smaller-entity alternative uses 10 basis points for the qualified ₹50 crore-or-less banking-system-exposure category; new/project cases use the projected-EBID method and stated minimum 20 basis points.
LEI and property valuation have distinct thresholds
A non-individual borrower with aggregate covered bank/FI exposure of ₹5 crore or more must obtain the required LEI. Include covered funded/non-funded and investment exposures using the higher of aggregate sanctioned limit or outstanding; non-compliance restricts new/renewed/enhanced exposure. The Government-department exemption is not extended merely because a company is Government-owned. Separately, properties valued at ₹50 crore or more need at least two independent valuation reports under the stated policy. A valuation is not proof of CERSAI registration or security priority.
Use operative Chapter XIA for current and overdraft accounts
From 1 April 2026, Chapter XIA replaces deleted Chapter XI. This chapter does not restrict CC facilities, though other lending rules continue. For current/OD accounts, the ordinary unrestricted threshold is system exposure below ₹10 crore. At/above it, the stated 10% aggregate-exposure or fund-based-share tests and qualified two-largest-bank/NOC alternatives apply. Other eligible accounts can be collection accounts, with ordinary transfer of proceeds within two working days and permitted deductions. Statutory/product-specific accounts have defined conditions rather than a blanket exemption.
Monitor account eligibility and the working-capital loan split
Review eligibility at least half-yearly. When it is lost, notify within one month of observing it and complete the prescribed conversion/closure within three months. Flag accounts in CBS and monitor end use/pass-through activity. For the covered ₹150 crore-or-more aggregate funded working-capital-limit category, maintain the minimum 60% loan component with the stated exclusions and split-base rules at each bank, including a consortium member. The loan component’s tenor cannot be less than seven days.
Practical illustration and assumptions
Suppose the prescribed potential UFCE loss is ₹9 crore and EBID is ₹12 crore. The ratio is exactly 75%, so the current up-to-75% bucket applies. A loss of ₹9.12 crore instead gives 76% and moves to the above-75% bucket. For a ₹200 crore applicable exposure base, an 80-basis-point addition is ₹1.6 crore of extra provision. A separate 25-percentage-point risk-weight increase changes a 50% risk weight to 75%, adding ₹50 crore RWA on that base. It is not a 25% multiplier on 50%.
Questions answered
Can a committee approve a loan that the statutory restrictions prohibit?
No. Eligibility and prohibitions apply before the approval threshold.
Is the Audit Committee the sanctioning committee for related-party loans?
No. It is expressly excluded from that sanctioning role; it receives policy deviations in its separate oversight role.
Are old Chapter XI transaction-account limits still the starting point?
No. The current consolidated source marks that chapter deleted from April 2026 and provides operative Chapter XIA.
Official sources and editions
Illustrations are hypothetical and depend on the stated assumptions. Official blank formats and guidance are identified separately from completed reports.