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Master Circular: Loans and Advances – Statutory and Other Restrictions

This Master Circular consolidates the instructions issued by the Reserve Bank of India to banks on statutory and other restrictions on Loans and Advances.

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    Category Banking
    Regulation Code RBI/2011-12/59 DBOD.No.Dir.BC. 6/13.03.00/2011-12
    Effective Date 01 July 2011
    Last Amended Date 01 July 2011
    Status active
    Jurisdiction India
    Original PDF View PDF

    We have analysed the regulation and have provided a detailed summary of the key points and changes. You may avoid reading the whole regulation if you have read this.

    The document on Master Circular from the Reserve Bank of India (RBI), details statutory and regulatory restrictions on loans and advances issued to Scheduled Commercial Banks, excluding Regional Rural Banks.

    Purpose

    • The Master Circular consolidates RBI instructions on statutory and other restrictions related to loans and advances.

    WHAT

    The Master Circular consolidates and updates RBI’s guidelines and restrictions on loans and advances provided by Scheduled Commercial Banks (excluding Regional Rural Banks). It covers statutory restrictions, regulatory restrictions, and guidelines related to fair lending practices and loan recovery.

    WHY

    This circular ensures that banks operate within legal and regulatory frameworks, preventing imprudent lending, managing risks, and protecting depositors' interests. It provides a standardized approach to loan disbursement and management, ensuring consistency and financial stability in the banking sector.

    HOW

    The circular lays down rules for:

    • Loan approval processes: Restrictions on loans to bank directors, their relatives, and other specific groups.
    • Security requirements: Guidelines on what types of securities can be accepted for loans.
    • Special cases: Specific instructions on lending against sensitive commodities, financing infrastructure projects, and providing credit to NBFCs.
    • Fair practices: Establishing fair lending practices and ensuring responsible recovery processes.

    WHO IS IT IMPORTANT FOR

    • Banks: Essential for all Scheduled Commercial Banks to ensure compliance with RBI regulations.
    • Regulators: Important for overseeing bank operations and ensuring systemic stability.
    • Financial Analysts: Useful for those analyzing bank practices and risk management.
    • Corporate Borrowers: Relevant for companies seeking loans, as it outlines what banks can and cannot do.

    WHAT THEY NEED/NEED NOT DO

    • Banks need to:
      • Implement the guidelines strictly and maintain compliance.
      • Ensure all loans are properly secured and vetted.
      • Regularly review and update internal policies to align with the circular.
    • Banks need not:
      • Provide loans or advances against their own shares.
      • Engage in unethical practices like quid pro quo arrangements.
      • Sanction loans against certain sensitive commodities without adhering to RBI’s specific guidelines.

    Key Sections

    1. Statutory Restrictions

      • Advances Against Bank’s Own Shares: Banks are prohibited from granting loans against their own shares under Section 20(1) of the Banking Regulation Act, 1949.
      • Advances to Bank's Directors: Strict guidelines prevent banks from granting loans to their own directors or their associated firms/companies, except under specific exemptions. Approval from the RBI is required for certain transactions.
      • Holding Shares in Companies: Banks cannot hold more than 30% of a company’s paid-up share capital or their own paid-up capital and reserves, whichever is lower.

    2. Regulatory Restrictions

      • Loans to Relatives of Directors: Banks must obtain prior Board approval before granting loans to relatives of directors. Loans cannot exceed certain limits (e.g., Rs. 25 lakhs).
      • Loans to Officers and Relatives of Senior Officers: Loans to bank officers or their relatives require approval from higher authorities and must be reported to the Board.
      • Financial Assistance to Industries Using Ozone-Depleting Substances (ODS): Banks are prohibited from financing new units producing/consuming ODS.
      • Advances Against Sensitive Commodities: Special Credit Control (SCC) measures restrict advances against certain commodities to prevent speculative holding.

    3. Restrictions on Other Loans and Advances

      • Loans Against Shares, Debentures, and Bonds: Banks can provide loans to individuals against these securities but with specific conditions, including maximum loan amounts, required margins, and proper valuation.
      • Money Market Mutual Funds (MMMFs): Banks should follow SEBI regulations for MMMFs. They require RBI clearance to set up MMMFs.
      • Advances Against Fixed Deposit Receipts (FDRs) Issued by Other Banks: Banks are advised against sanctioning loans against FDRs from other banks due to past fraud cases.
      • Bank Finance to Non-Banking Financial Companies (NBFCs): Guidelines for financing NBFCs are provided in a separate Master Circular.
      • Financing Infrastructure/Housing Projects: Includes definitions of infrastructure lending and conditions for financing infrastructure projects, highlighting the importance of appraising technical feasibility and financial viability.

    4. Guidelines on Fair Practices Code for Lenders

      • Banks are required to adhere to a fair practices code when lending, ensuring transparency and fairness in their dealings with borrowers.

    5. Guidelines on Recovery Agents

      • Banks engaging recovery agents must ensure these agents follow the prescribed code of conduct, treating borrowers with respect and adhering to legal processes.