Loans and Advances by UCBs to Directors, their Relatives, and Firms

Soumya Bajpai

13 Sep, 2022

The Banking Regulation Act, 1949 has been amended by the Banking Regulation (Amendment) Act, 2020 notified for the Primary Urban Co-operative Banks (UCBs) on 29th September 2020 and deemed to have been effective from 29th June 2020. Consequently, Section 20 of the Act has become applicable to UCBs. However, the extent directions on the subject issued to UCBs have been reviewed, and the revised rules are published.

New Circular on Loans and Advances by UCBs to Directors

UCBs will not make, provide or renew any advances or loans or extend any other financial support to or on behalf of their directors or their relatives, or to the firms/companies/concerns in which directors or their relatives are interested (collectively known as “director related loans”). Furthermore, the directors or their relatives or the firms/companies/concerns in which the directors or their relatives are interested must also not stand as surety/guarantor to the loans and advances or any other financial accommodation sanctioned by the UCBs. ‘Advances’ for the purpose must include all types of funded/working capital limits such as cash credits, overdrafts, credit cards, etc.

The following categories of director-related loans must, however, be excluded from “loans and advances” for the purpose of these directions:

• Regular employee-related loans to staff directors, on Boards of UCBs;
• Normal loans, as are applicable to members, to the directors on Boards of Salary Earners UCBs;
• Normal employee-related loans to the Managing Directors/Chief Executive Officers of UCBs; and
• If against Government Securities, Fixed Deposits, and Life Insurance Policies, loans to directors or their relatives stand in their own name.

Explanation: For these directions

The term ‘any other financial accommodation’ must include funded and non-funded credit limits and underwritings and similar commitments, as under:

• The funded limits must include loans and advances by way of/cheque purchase, pre-shipment/bill, discounting and post-shipment credit facilities, and deferred payment guarantee limits extended for any purpose including the purchase of capital equipment and acceptance limits in connection there with sanctioned to borrowers, and guarantees by the issue of which a bank undertakes a financial obligation to enable its constituents to acquire capital assets. It shall also include investments that are in the nature of/in lieu of credit.
• The non-funded limits must include letters of credit, guarantees other than those referred above, underwritings, and similar commitments. It shall also have off-balance-sheet exposure in the form of derivatives.

Who can be considering as a Relative to Director?

The word “relative” will have the meaning as a person shall be supposed to be a relative of another, if and only if:-

• They are members of a (HUF) Hindu Undivided Family; or
• They are husband and wife; or
• The one is related to another (or vice-versa) in the manner indicated below:
• Father (including step-father)
• Mother (including step-mother)
• Son (including step-son)
• Son’s wife
• Daughter (including step-daughter)
• Daughter’s husband
• Brother (including step-brother)
• Brother’s wife
• Sister (including step-sister)
• Sister’s husband
• The word “interested” will mean the director of the UCB or his relative, as the condition maybe, being a director, managing agent, manager, proprietor, partner, employee, guarantor, or coparcener, as the condition may be, of the company/firm concern (including the HUF).

Provided that the director of a UCB or his relative will also be deemed to be interested in a company, being a subsidiary or holding company, if he or she is a director of a company, managing agent, manager, employee, or guarantor of the respective holding or subsidiary company.

Provided further that the director of a UCB will also be deemed to be interested in a company/firm if he/she holds a substantial interest in or is in control of the company/firm or a company, being the subsidiary or holding company if he/she has a substantial interest in or is in control of the respective holding or subsidiary company

Provided further that the relative of the director of a UCB must also be deemed to be excited in a company/firm if he/she is a significant shareholder or is in control of the company/firm or a company, being the subsidiary or holding company if he/she is a significant shareholder or is in control of the respective holding or subsidiary company.

Other Important term in the Circular

The term “substantial interest” must have the same meaning as assigned to it in section 5 (ne) of the Banking Regulation Act, 1949^[1].

The term “control” must include the right to appoint a majority of the directors or to control the policy decisions exercisable by an individual or persons acting in concert or individually,, including by virtue of their shareholding or rights of managment or agreements or voting agreements or in another manner.

The term “major shareholder” must mean a person holding 10% or more of the paid-up share capital.

Role Loans and advances by UCBs

UCBs must submit information pertaining to the director-related loans as at the end of each quarter (i.e., 31st March, 30th June, 30th September, and 31st December), in the format given in the Annexure to these directions, to the concerned Regional Office of Department of Supervision of Reserve Bank of India within 15 days from the end of the respective quarter. In the case of UCBs functioning under Administrator/ Person-in-Charge/Special Officers, the UCBs concerned must submit information in repect of loans and advances availed by the /Person-in-Charge/Special Officers/Administrator, including the relatives.

Conclusion

The directions supersede the earlier directives/instructions issued on the subject, and it will come into force immediately. The existing director-related loans sanctioned/granted by the UCBs in terms of previous directives/instructions before this circular issue, if any, may continue till their respective maturity and shall not be renewed further. A copy of a circular must be placed before the Board of Directors of your bank in its next meeting. A confirmation thereof must be sent to the concerned Regional Office of the Department of Supervision of Reserve Bank of India.

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