What changed
This master circular updates the previous July 2006 version by incorporating all instructions issued up to June 30, 2007. It consolidates statutory restrictions under the Banking Regulation Act, 1949, and regulatory restrictions on lending to directors, officers, and sensitive sectors. The circular also covers restrictions on advances against shares, gold, real estate, and to NBFCs.
What it means for you
Banks must ensure all loan and advance policies align with the consolidated restrictions, especially regarding director-related lending and sector-specific caps. Non-compliance with statutory provisions like Section 20(1) can attract regulatory action. The circular serves as a single reference point for compliance, reducing ambiguity across multiple circulars.
What you must do
- Review and update internal loan policies to reflect all statutory and regulatory restrictions listed in the master circular.
- Ensure no loans are granted against the bank's own shares or to directors/firms where directors have substantial interest, except as exempted.
- Verify compliance with sector-specific restrictions on real estate, gold loans, NBFC financing, and sensitive commodities.
- Train credit officers on the updated restrictions, especially those on advances to officers and their relatives.
- Maintain documentation to demonstrate adherence to the circular for RBI inspections.
Who it affects
All scheduled commercial banks (excluding RRBs), Credit and loan sanctioning departments, Compliance and risk management teams, Board of directors and senior management
Can a bank grant a loan to a company where one of its directors is also a director?
Generally no, unless the company is a subsidiary of the bank, a Section 25 company under the Companies Act, 1956, or a government company. Otherwise, such loans are prohibited under Section 20(1) of the Banking Regulation Act.
Are there any exemptions to the prohibition on loans to directors?
Yes, RBI may specify by general or special order that certain transactions are not considered 'loans or advances' for this purpose, based on the nature, period, and recovery prospects of the transaction.
Does this circular apply to Regional Rural Banks (RRBs)?
No, the circular explicitly excludes RRBs from its scope. It applies to all other scheduled commercial banks.