What changed
RBI issued a clarification on April 19, 2005, regarding an earlier circular from August 7, 2004, which had barred directors and their relatives from standing as sureties/guarantors for UCB loans. The clarification states that loans already sanctioned before October 1, 2003, with such guarantees can continue until maturity without being unwound. However, the ban on fresh borrowal arrangements with director/relative guarantees remains in full force.
What it means for you
UCBs can maintain existing loan portfolios with director/relative guarantees without disruption, avoiding immediate restructuring or recall. This grandfathering provision gives banks operational stability for legacy accounts. However, the strict prohibition on new guarantees from directors/relatives means UCBs must ensure all fresh lending complies with the ban, requiring robust credit appraisal and monitoring processes.
What you must do
- Identify all loans with director/relative guarantees sanctioned before October 1, 2003, and tag them for continued monitoring until maturity.
- Ensure no new loan or advance is sanctioned with a director or relative as surety/guarantor, as per the August 2004 circular.
- Update internal credit policies and loan sanction checklists to explicitly prohibit director/relative guarantees for new facilities.
- Train loan officers and credit committees on the grandfathering rule and the absolute ban on fresh guarantees.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Directors and their relatives of UCBs, Borrowers with existing loans backed by director/relative guarantees
Can we still accept director guarantees for loans sanctioned before October 1, 2003?
Yes, such guarantees can continue until the loan matures. You do not need to unwind or replace them.
Does this clarification allow any new loans with director guarantees?
No. The ban on fresh borrowal arrangements with director/relative guarantees remains absolute. No new loans can be sanctioned with such guarantees.