This blog is published by Pawni Singh and Prikshit Rathore.
They are students of Gujarat National Law University ,Silvassa
A director of a Scheduled Commercial Bank can, under the RBI’s current rules, borrow money through his Hindu Undivided Family without triggering any governance protections. No board approval, disclosure or recusal is mandated. The conflict of interest that Section 20 of the Banking Regulation Act, 1949 was enacted to prevent, operates in this scenario, without any of Section 20’s consequences being attached at all. The RBI restructured the related-party lending framework for Scheduled Commercial Banks through the Credit Risk Management Amendment Directions 2026, dated 5 January 2026, by inserting a new Chapter V, and in doing so, explicitly defined “Entity” to exclude both individuals and Hindu Undivided Families. The thesis here is that this exclusion is analytically indefensible on two independently sufficient grounds: it cannot be reconciled with Section 20’s governing logic, and it produces a direct, unexplained contradiction with the RBI’s own framework for Urban Cooperative Banks, which operates under the identical statutory provision. This UCB framework, after the 2020 extension of Section 20 to cooperative banks, already treats a director’s coparcenary interest in a borrowing Hindu Undivided Family as this sort of disqualifying conflict that needs board approval.
The stakes are not theoretical. Business-owning families remain a major force in the Indian enterprise, covering manufacturing, healthcare, FMCG, infrastructure and financial services. Family representation on boards of private-sector banks has historically been recognised as a governance concern: the RBI’s own guidelines recommend that not more than one family member or close relative serve on a single bank’s board, as a matter of desirable practice. The HUF is not an archaic legal form in commercial India; it is a functioning vehicle through which many promoter-directors hold assets, operate businesses, and access credit. When the governance framework for India’s commercial banking sector, with a combined asset base exceeding ₹200 lakh crore, contains a structural blind spot affecting precisely this class of borrower, the omission is not marginal. It is systemic.
The Purposive Logic of Section 20 and Why the HUF Fits It
Section 20(1)(b) of the Banking Regulation Act prohibits a Scheduled Commercial Bank from granting loans or advances to any director of the bank; to any firm in which a director holds a financial interest as partner, manager, employee, or guarantor; to any company in which a director is associated as director, managing agent, employer, guarantor, or substantial shareholder; and to any person for whom a director acts as partner or guarantor. If read textually, the Hindu Undivided Family does not appear in any of those categories. The Supreme Court confirmed in Commissioner of Income Tax v. Indira Balkrishna, AIR 1960 SC 1172, that the HUF is a legal entity distinct from its individual members, and no provision of the Banking Regulation Act expressly treats coparcenary membership, the birthright interest each member holds in the family’s undivided property, as a triggering connection. The textual gap is real.
The question is whether that gap survives purposive scrutiny. The Statement of Objects and Reasons behind Section 20 identifies the prevention of directors directing credit towards entities in which they hold a personal pecuniary interest as its governing purpose. Examining the four categories listed in Section 20(1)(b), each describes a situation where the director holds an interest that is: legally recognised and enforceable; variable in value depending on the borrower’s commercial success; and incapable of unilateral disclaimer. Every listed category satisfies this three-element structure. Coparcenary interest, as the Supreme Court settled in Vineeta Sharma v. Rakesh Sharma (2020) 9 SCC 1, satisfies all three elements equally. A coparcenary interest vests by birth, not by choice; it can be enforced through a demand for partition; and it cannot be disclaimed without either the consent of all coparceners or judicial intervention. Its value fluctuates with the HUF’s assets; a profitable deployment of a bank loan increases what is available on partition, a default reduces it. Structurally, the coparcenary interest more closely resembles the guarantor relationship, explicitly listed under Section 20(1)(b)(ii), than it does the category of a mere bystander, since both involve a financial stake that persists until formal legal action dissolves it.
Where the director is also the karta, the HUF’s managing member, authorised under Hindu personal law to incur debts binding on all coparceners, the conflict is not structural but literal. A director-karta who participates in decisions about whether his HUF should receive credit from the bank he governs simultaneously occupies the role of decision-maker on the bank’s side and authorised representative of the borrower on the other. No inferential reasoning is required at that point. The same individual is present on both sides of the transaction, and the 2026 Directions require nothing of him: not disclosure, not recusal, not board approval.
The RBI’s Own UCB Framework Makes the Inconsistency Undeniable
Formalist objections to purposive interpretation have weight, and a court applying restrictive canons of statutory construction might resist extending Section 20’s categories beyond their textual boundaries. That objection, however, does not survive the RBI’s own behaviour in an adjacent context. Following the Banking Regulation (Amendment) Act 2020, which extended Section 20 of the Banking Regulation Act to Urban Cooperative Banks, the RBI issued fresh directions governing loans and advances to UCB directors. Those directions define a director as “interested” where the director is a coparcener of any firm, company, or concern, including a Hindu Undivided Family. The RBI, applying the same Section 20 to UCBs, made an explicit and considered regulatory choice to treat coparcenary membership as a cognisable conflict of interest requiring board-level governance. That choice was not accidental; it was a recognition that a coparcener’s financial stake in a borrowing HUF creates the precise conflict that Section 20 was designed to regulate.
Both the UCB framework and the 2026 Directions apply under Section 20 of the Banking Regulation Act. Coparcenary law is uniform across both contexts; a coparcener in a family that banks with a UCB holds an interest structurally identical to a coparcener in a family that banks with a Scheduled Commercial Bank. The RBI cannot coherently accept that coparcenary membership creates a regulable conflict in one setting while denying that the same interest creates any conflict at all in a materially identical setting under the same statute, without providing a principled basis for the distinction. No such basis has been offered. The Revised Credit Facilities Amendment Directions 2026 include Para 219E, which classifies non-commercial HUFs within the retail lending framework for credit risk purposes. The RBI may intend this as an acknowledgement of HUF exposure, but it resolves a different problem entirely. Retail classification governs how a loan is categorised for prudential capital purposes. Section 20 governance governs who is permitted to make the decision to extend the loan in the first place. Addressing the former while leaving the latter untouched does not constitute a solution; it is a category error dressed as a remedy.
What Correction Requires and Why It Cannot Wait
The RBI holds the tools to fix this without legislative intervention. Section 35A of the Banking Regulation Act empowers the RBI to issue binding directions whenever necessary in the public interest or in the interest of depositors. The Supreme Court held in Indian Banks’ Association Bombay v. M/s Devkala Consultancy Service (2004) 11 SCC 1 that the powers conferred under Sections 21 and 35A are confined to, and may only be exercised for, the public interest and depositor-protection purposes the statute specifies. Three features of the present situation place this squarely within that scope. The Scheduled Commercial Bank sector’s asset base, orders of magnitude larger than the UCB sector, means the governance deficit operates at a scale where even isolated conflicts can produce material harm. The prevalence of HUF structures among promoter-director families means this is not a theoretical edge case but a structural feature of Indian commercial banking. And the absence of any disclosure requirement whatsoever means that neither the board, nor the RBI through its supervisory function, nor depositors through any available mechanism, can identify when the conflict is operative at all. A governance risk that is invisible to every oversight layer simultaneously is not a gap in need of filling by judicial interpretation over years of litigation; it is a gap in need of regulatory correction now.
The amendment required is minimal in drafting terms and significant in consequence. Removing the Hindu Undivided Family from the exclusion in the definition of “Entity” under Chapter V of the 2026 Directions is sufficient. The existing architecture of related-party governance, board approval, disclosure, and recusal would then operate as intended. No new mechanism is needed. What is needed is the acknowledgement that a framework designed to prevent directors from directing credit to entities in which they hold a personal, enforceable, non-disclaimable financial interest cannot coherently exempt the one structure in which those three features are most durably combined under Indian law.
The 2026 Directions represent a serious attempt at reform. The correction requires neither any new legislation nor any litigation; it simply involves deletion of the one exemption to the term “Entity” in Chapter V of the 2026 Directions. Until the RBI implements this change, a director of a Scheduled Commercial Bank continues to be the exception to the applicability of Section 20 of the Hindu Undivided Family.