Statutory Restrictions
Advances against Bank’s own Shares
In terms of Section 20(1) of the Banking Regulation Act 1949, a bank cannot grant any loan or advance against the security of its own shares.
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.
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 8 of the Companies Act, 2013 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. There are certain exemptions given in the aforesaid Master Circular in this regard.
For the above purpose, the term ‘loans and advances’ shall not include the following:
(a) loans or advances against Government securities, life insurance policies or fixed deposit;
(b) loans or advances to the Agricultural Finance Corporation Ltd;
(c) 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;
(d) 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 hisbpersonal use and festival advance, with the prior approval of the RBI and on such terms and conditions as may be stipulated by it;
(e) 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;
(f) call loans made by banking companies to one another;
(g) 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.;
(h) line of credit/overdraft facility extended by settlement bankers to National Securities Clearing Corporation Ltd.(NSCCL) / Clearing Corporation of India Ltd. (CCIL) to facilitate smooth settlement; and
(i) a credit limit granted under credit card facility provided by a bank to its directors to the extent the credit limit so granted is determined by the bank by applying the same criteria as applied by it in the normal conduct of the credit card business.
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.