MUMBAI (TIP): Reserve Bank relaxed norms for banks to grant certain loans to their CEOs and directors by doing away with the prior approval requirement.
Section 20 of Banking Regulation Act, 1949 (B.R. Act, 1949) prohibits banks from granting any loan or advance to any of its directors.
However, banks can give loan to Chief Executive Officer/ Whole Time Directors for purchasing of car, personal computer furniture, constructing/acquiring a house for personal use, festival advance and credit limit under credit card facility.
“In order to streamline the existing processes and to obviate the need to approach RBI on case-to-case basis, it has been decided…commercial banks can grant loans and advances to the Chief Executive Officer/ Whole Time Directors, without seeking prior approval of RBI,” the central bank said. Also, the guidelines on ‘Base Rate’ will not be applicable on the interest charged on such loans.
“However, the interest rate charged on such loans cannot be lower than the rate charged on loans to the bank’s own employees,” the RBI said.
Another condition is that the loans and advances should form part of the compensation / remuneration policy approved by the Board of Directors or any committee of the Board to which powers have been delegated or the Appointments Committee, as the case may be. The RBI further said: “Banks should note that in view of the prohibition under Section 20 of the BR Act, 1949, apart from the (specified) loans…no other loan can be sanctioned to directors.”