RBI approves loan to Directors of other Banks

RBI approves loan to Directors of other Banks


Reserve Bank of India (RBI) conveys that Banks can now sanction ‘personal loans’ to directors and relatives of directors of other banks for an amount up to Rs 5 crore without the prior approval of the Board and management commit.  This limit was     Rs 25 lakh earlier.

Earlier, the RBI rules stated that loans aggregating Rs25 lakh or above can be sanctioned only with the approval of the board of directors or management committee.

On review RBI felt that in order to reflect the increase in general prices, since 1996, the old threshold of Rs. 25 lakh required to be revised.  This was to encourage professionals with expertise to join the Boards and reduce the cases requiring approval at the board/ management committee level without diluting the regulatory intent, the RBI said.

Who is eligible for the enhanced limit?

  1. This rule was applicable to loans to directors of other banks including associated companies and firms, loans to relatives of a bank’s own directors, including associated companies and firms and loans to relatives of directors of other banks, including associated companies/firms.
  2. However, the increased threshold will be applicable for grant of only ‘personal loans’ to any director of other banks.
  3. The existing threshold of Rs 25 lakh will continue to apply for business loans to directors of other banks, the RBI said.
  4. Currently, sanction by the board/ management committee for grant of loans to a company is required, where the relative of a director holds substantial interest which is defined as 10% of paid-up capital or Rs5 lakh, whichever is less.

Further RBI source adds that since this would result in a disproportionate burden on the board/ management committee, this stipulation has been relaxed by mandating that sanction of board/ management committee would be required only when the relative is a major shareholder in a company (which is defined as holding of 10 per cent or more of paid-up share capital or five crore rupees in paid up shares, whichever is less).

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