Connected Lending. What is Connected Lending, RBI Guidelines on Connected Lending Relationships.
What is Connected Lending?
If a Bank owned by private person or entities, start to lend to it’s different verticals. To safeguard the interest of customers and stake holders, the Reserve Bank of India (RBI) has set few norms for that.
Example- Mr X is a owner/director of a Bank and he is also involved in different business like aviation, telecom, retail, insurance, infrastructure etc. If he utilities banks fund to finance his other vertical it will be termed as Connected Lending.
What happens in connected lending is that the bank of Mr X might be in profit but Mr X’s verticals might be in losses, to sustain that losses he might not increase interest rates and also will not pay dividend to stake holders which has to be given as the bank was in profit.