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DBOD No. Dir. BC. 18 /13.03.00/2003-04
August 22, 2003
Shravana, 31 1925(S)
Chief Executives of all Scheduled Commercial Banks
(Excluding RRBs & LABs)
Dear Sir,
Master Circular-Loans and Advances –Statutory and Other Restrictions
Please refer to the Master Circular DBOD. No. Dir. BC. 9/13.03.00/2002-03 dated July 29, 2002 consolidating the instructions/guidelines issued to banks till 30th June 2002 relating to statutory and other restrictions on Loans and Advances. The Master Circular has been suitably updated by incorporating the instructions issued up to 30th June 2003 and has been placed on the RBI website ()
2. It may be noted that all the instructions contained in circulars listed in the Appendix have been consolidated. We advise that this revised Master Circular supersedes the instructions contained in these circulars issued by the RBI.
Yours faithfully
(B. Mahapatra)
Chief General Manager
Contents
1. Statutory Restrictions
2. Regulatory Restrictions
3. Restrictions on other loans and advances
Annexure 1
Annexure 2
Annexure 3
AppendixMaster Circular on Loans and Advances – Statutory and Other Restrictions
1. Statutory Restrictions
1.1 Advances against bank's Own Shares
In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans and advances on the security of its own shares.
1.2 Advances to bank's Directors
Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans and advances to the Directors and the firms in which they hold substantial interest.
1.2.1 The banks are prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any firm in which any of its directors is interested as partner, manager, employee or guarantor, or any company (not being a subsidiary of the banking company or a company registered under Section 25 of the Companies Act, 1956, or a Government company) of which, or the subsidiary or the holding company of which any of the directors of the bank is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or any individual in respect of whom any of its directors is a partner or guarantor.
1.2.2 There are certain exemptions in this regard. In the explanation to the Section, ‘loans or advances’ shall not include any transaction which the Reserve Bank may specify by general or special order as not being a loan or advance for the purpose of this Section. While doing so the RBI shall, keep in view the nature of the transaction, the period within which, and the manner and circumstances in which, any amount due on account of the transaction is likely to be realised, the interest of the depositors and other relevant considerations.
1.2.3 If any question arises whether any transaction is a loan or advance for the purpose of this Section, it shall be referred to RBI, whose decision thereon shall be final.
1.2.4 For the above purpose, the term 'loans and advances' shall not include the following: -
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loans or advances against Government securities, life insurance policies or fixed deposit;.
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loans or advances to the Agricultural Finance Corporation Ltd;
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such loans or advances as can be made by a banking company to any of its directors (who immediately prior to becoming a director, was an employee of the banking company) in his capacity as an employee of that banking company and on the same terms and conditions as would have been applicable to him as an employee of that banking company, if he had not become a director of the banking company. The banking company includes every bank to which the provisions of Section 20 of the Banking Regulation Act, 1949 apply.
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such loans or advances as are granted by the banking company to its Chairman and Chief Executive Officer, who was not an employee of the banking company immediately prior to his appointment as Chairman/ Managing Director/CEO, for the purpose of purchasing a car, personal computer, furniture or constructing/ acquiring a house for his personal use and Festival Advance, with the prior approval of the RBI and on such terms and conditions as may be stipulated by it.
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such loans or advances as are granted by a banking company to its whole-time director for the purpose of purchasing furniture, car, personal Computer or constructing/acquiring house for personal use, Festival advance with the prior approval of RBI and on such terms & conditions as may be stipulated by it.
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call loans made by banking companies to one another.
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facilities like bills purchased/discounted (whether documentary or clean and sight or usance and whether on D/A basis or D/P basis), purchase of cheques, other non-fund based facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of guarantees, purchase of debentures from third parties etc.
Note: For obtaining the prior approval of the Reserve Bank as stipulated in clause (d) and (e) above, the bank should make an application to the concerned regional office of the Bank.
1.2.5 Purchase of or discount of bills from directors and their concerns which is in the nature of clean accommodation is reckoned as ‘loans and advances’ for the purpose of Section 20 of the Banking Regulation Act, 1949.
1.2.6 As regards giving guarantees and opening of L/Cs on behalf of bank’s directors, it is pertinent to note that in the event of the principal debtor committing default in discharging his liability and the bank being called upon to honour its obligations under the guarantee or L/C, the relationship between the bank and the director could become one of the creditor and debtor. Further, it is possible for the directors to evade the provisions of Section 20 by borrowing from a third party against the guarantee given by the bank. Such transactions may defeat the very purpose of restrictions imposed under Section 20, if the bank does not take appropriate steps to ensure that the liabilities there under do not devolve on them.
1.2.7 In view of the above, while extending non-fund based facilities such as guarantees, L/Cs, acceptance on behalf of directors and the companies/firms in which the directors are interested, it should be ensured that -
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adequate and effective arrangements have been made to the satisfaction of the bank that the commitments would be met by the openers of L/Cs, or acceptors, or guarantors out of their own resources,
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the bank will not be called upon to grant any loan or advance to meet the liability consequent upon the invocation of guarantee, and
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no liability would devolve on the bank on account of LCs/ acceptances.
1.2.8 In case, such contingencies arise as at (b) & (c) above, the bank will be deemed to be a party to the violation of the provisions of Section 20 of the Banking Regulation Act, 1949.
1.2.9 Restrictions on Power to Remit Debts
Section 20A of the Banking Regulation Act, 1949 stipulates that notwithstanding anything to the contrary contained in Section 293 of the Companies Act, 1956, a banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by -
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any of its directors, or
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any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or
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any individual, if any of its director is his partner or guarantor.
Any remission made in contravention of the provisions stated above shall be void and have no effect.
1.3 Restrictions on Holding Shares in Companies
1.3.1 In terms of Section 19(2) of the Banking Regulation Act, 1949, the banks should not hold shares in any company except as provided in sub-section (1) whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less.
1.3.2 Further, in terms of Section 19(3) of the Banking Regulation Act, 1949, the banks should not hold shares whether as pledgee, mortgagee or absolute owner, in any company in the management of which any managing director or manager of the bank is in any manner concerned or interested.
1.3.3 Accordingly, while granting loans and advances against shares, statutory provisions contained in Sections 19(2) and (3) should be strictly observed.
1.4 Restrictions on Credit to Companies for Buy-back of their Securities
In terms of Section 77A(1) of the Companies Act, 1956, the companies are permitted to purchase their own shares or other specified securities out of their
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free reserves, or
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securities premium account, or
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the proceeds of any shares or other specified securities,
subject to compliance of various conditions specified in the Companies (Amendment) Act, 1999. Therefore, the banks should not provide loans to companies for buy-back of shares/securities.
2. Regulatory Restrictions
2.1 Granting loans and advances to relatives of Directors
Without prior approval of the Board or without the knowledge of the Board, no loans and advances should be granted to relatives of bank's Chairman/Managing Director or other Directors, Directors (including Chairman/Managing Director) of other banks and their relatives, Directors of Scheduled Co-operative Banks and their relatives, Directors of Subsidiaries/Trustees of Mutual Funds/Venture Capital Funds set up by the financing banks or other banks as per details given below
2.1.1 Lending to directors and their relatives on reciprocal basis
There have been instances where certain banks have developed an informal understanding or mutual/reciprocal arrangement among themselves for extending credit facilities to each other’s directors, their relatives, etc. By and large, they did not follow the usual procedures and norms in sanctioning credit limits to the borrowers, particularly those belonging to certain groups or directors, their relatives, etc. Facilities far in excess of the sanctioned limits and concessions were allowed in the course of operation of individual accounts of the parties. Although, there is no legal prohibition on a bank from giving credit facilities to a director of some other banks or his relatives, serious concern was expressed in Parliament that such quid pro quo arrangements are not considered to be ethical. The banks should, therefore, follow the guidelines indicated below in regard to grant of loans and advances and award of contracts to the relatives of their directors and directors of other banks and their relatives:
2.1.2 Unless sanctioned by the Board of Directors/Management Committee, banks should not grant loans and advances aggregating Rs. 25 lakhs and above to -
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directors (including the Chairman/Managing Director) of other banks *;
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any firm in which any of the directors of other banks * is interested as a partner or guarantor; and
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any company in which any of the directors of other ba |