RBI Puts Cap On Loans To Directors

Mumbai, December 21: | Updated: Dec 22 2002, 05:30am hrs
In a move to obviate conflict of interest in lending operations of financial institutions, the Reserve Bank has directed them not to grant loans or advances on the security of its own shares or enter into any commitment on behalf of their directors in which they may have interests.

FIs or its subsidiary should not grant loans to a director who holds substantial interests to an individual, who is a partner or a guarantor of the concerned director, the central bank on Saturday said in a notification to FIs.

To address the issue of reciprocal arrangements among FIs and banks for extending credit and non-funded facilities, awarding contracts to each others directors or their kin, RBI said FIs should not grant loans of Rs 25 lakh and above to any director who holds substantial interest or is interested as one or as a guarantor.

The RBI has also made it clear that unless the board or management committee sanctions, FIs should also not grant loans and advances aggregating Rs 25 lakh and above to any relatives of FIs chairmen and managing directors or other directors. But proposals for less than Rs 25 lakh may be sanctioned by the appropriate authority but the institution should report the matter to the board. Where any loan or advance has not been repaid to the FI within the stipulated period, such person shall, if he is a director on the date of expiry of the aforesaid period, is deemed to have vacated his office, it said.

On extending guarantees and establishing letters of credit on behalf of its directors, RBI has said in the event of default by the principal debtor, the FI will have to honour its obligations and the relationship between the FI and the director can become one of a creditor and a debtor.

The apex bank has further said the FI will not be called upon to grant any loan or advance to meet the liability consequent upon the invocation of guarantee or devolvement of letter of credit and no liability will devolve on the FI.

With reference to loans and advances to relatives of the FI directors or them, RBI said such loans should not be granted except to the extent permitted in the guidelines laid down by it.