IFSCA Strengthens Governance for Related-Party Lending by IBUs

Circular No. e-file No. 110/IFSCA/Banking Regulation/2020-21; Dated: 08.12.2025

1. Regulatory Overview

The International Financial Services Centres Authority (IFSCA) has issued amendments to Module 16 of the IFSCA Banking Handbook, which governs the framework for provision of credit by IFSC Banking Units (IBUs). The amendments clarify the applicability of certain lending restrictions and strengthen governance standards relating to related-party lending and conflict-free decision-making.

2. Non-Applicability of Section 20(1) Restrictions to Foreign Bank IBUs

Section 20(1) of the Banking Regulation Act, 1949, imposes restrictions on banks in India in respect of granting loans or advances to:

any of its directors,
firms or companies in which a director is interested, or
certain related entities.

2.1 Clarification by IFSCA

The IFSCA has clarified that these restrictions will not apply to foreign bank IBUs operating in GIFT IFSC.

This exemption recognises:

the international nature of foreign bank operations in GIFT IFSC,
the broader regulatory architecture governing foreign banks, and
the need to maintain parity with global wholesale banking practices within IFSC.

3. Policy Requirements for Related-Party Lending

Despite the above exemption, IBUs must adhere to enhanced governance and conflict-mitigation requirements, especially when extending loans or advances to:

a director of the Parent Bank, or
any related party of the Parent Bank

3.1 Mandatory Internal Policy

IBUs are required to:

formulate a policy on loans and advances, covering approval norms, due diligence, credit appraisal, documentation, exposure conditions, and risk controls
ensure that credit decisions are free from conflicts of interest, particularly in cases involving directors, parent-entity relationships, or connected lending arrangements

This reinforces sound internal checks, prudential oversight, and independent decision processes, even where statutory prohibitions are relaxed.

4. Governance Expectations

The amendments emphasise that:

IBUs must maintain transparent approval processes
Any lending decision involving directors or related parties must be subject to:

1. independent review,
2. board-level or committee-level supervision, and
3. robust record-keeping and documentation

The intent is to prevent undue influence, preferential terms, or misaligned credit decisions, while still permitting legitimate wholesale lending market activities within IFSC.

5. Regulatory Intent

IFSCA’s amendments seek to:

align IFSC credit operations with international banking norms for wholesale financial centres
reinforce prudential safeguards where statutory exemptions apply
ensure risk-based governance, conflict-free decision-making, and policy-driven internal controls
promote a stable credit ecosystem within GIFT IFSC without constraining legitimate cross-border financing arrangements

6. Compliance Considerations for IBUs

IBUs must:

draft or update their internal lending policy, with explicit provisions for related-party and director-linked exposures
maintain clear conflict-mitigation procedures, including abstention, independent approval, and controlled documentation
review credit committee frameworks to ensure independence and traceability
monitor exposures to parent-entity directors and affiliates to prevent reputational or supervisory concerns

Non-compliance may invite enhanced supervisory review, inspection findings, or operating restrictions.