RBI Notification

RBI revises Regulatory Restrictions on Loans and Advances

The Reserve Bank of India recently revamped the regulatory restrictions on loans and advances by banks to directors of other banks and related entities. The notification in this regard was released by the RBI on 23^rd July 2021, which provides for increased limits in loans & advances to be given by banks.

To whom this notification was issued?

The RBI sought to address all scheduled commercial banks excluding RRBs, all small finance banks and all local area banks.

Statutory Restrictions

As per Section 20 of the Banking Regulation Act 1949^[1], there is a complete prohibition on banks to enter into any commitment for granting loan to or on behalf of any of its directors and specified other parties wherein the director is interested. The master circular on loans and advances- statutory and other restrictions lays down the limits and prohibitions.

Amendment notification: Regulatory restrictions on loans and advances

The master circular on loans and advances- statutory and other restrictions specifies persons/entities to whom loans and advances can be extended up to a specified limit with the prior approval from board. Now the amendment notification introduced by the RBI vide notification dated 23^rd July 2021 has revised (enhanced) the limits for some classes of persons.

In the table made below, we have explained the existing limits and the amended enhanced limits.

CATEGORY	EXISTING LIMITS (MASTER CIRCULAR RBI)	AMENDED/REVISED LIMIT (RBI NOTIFICATION DATED 23RD JULY 2021)
Other banks’ Directors	Up to 25 lakh rupees	Up to 5 crore rupees for personal loans (this amendment shall apply only in case of personal loans).
Firms where directors of other banks are interested as partner/guarantor	Up to 25 lakh rupees	No Revision/Amendment
Companies wherein other banks’ directors hold substantial interest/ is a guarantor/director	Up to 25 lakh rupees	No Revision/Amendment
Relative (other than the spouse) and minor/ dependent children of Chairman/MD or other directors	Up to 25 lakh rupees	Up to 5 crore rupees
Relative (other than the spouse) and minor/ dependent children of Chairman/MD or other directors of other banks	Up to 25 lakh rupees	Up to 5 crore rupees
Firm wherein relatives mentioned above are partners/guarantors	Up to 25 lakh rupees	Up to 5 crore rupees
Companies where relatives are interested as director or guarantor, if he/she is a major shareholder	Up to 25 lakh rupees	Up to 5 crore rupees

The Central Bank also notified that the proposals for credit facilities of an amount less than 25 lakh rupees or 5 crore rupees (as per the case) to these borrowers could be sanctioned by the appropriate authority in financing bank under the powers vested in such authority, however, the matter should be reported to the board.

Explanation of certain terms

The RBI, in its notification, also explained certain terms which can be helpful for better understanding. These terms are as follows:

• Major shareholder-

As per the notification, major shareholder refers to a person holding 10% or more of paid up share capital of 5 crores rupees in paid up shares, whichever is less.

• Control-

This term shall include the right to appoint a majority of directors or to control the management or policy decisions exercisable by a person/persons acting individually or in concert, directly, or indirectly including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in other manner. 

• Personal loan-

The meaning of this term is taken from the RBI circular on harmonization of banking statistics. As per this circular, the meaning of personal loans is loans provided to individuals and consist of consumer credit, education loan, loans provided for creation/enhancement of immovable assets and loans extended for investment in financial assets.

What was the need for revision in regulatory restrictions in loans and advances?

The master circular on loans and advances- statutory and other restrictions was issued more than 5 years ago. Owing to the rising inflation, these limits became vague and ambiguous and hence required revision. Further, due to the impact of Covid-19 pandemic in the nation, such relaxation was forecasted.

Conclusion

So with the RBI’s notification on amendment to the regulatory restrictions on loans and advances, the limits have been raised in the loans and advances to be given by banks. We have attached the RBI’s notification in this regard with this article for better understanding.

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