The Reserve Bank of India (RBI), vide circular DBR.Dir. BC.No.38/13.03.00/2015-16, dated September 16, 2015, allowed commercial banks to grant loans and advances to its Chief Executive Officer (CEO)/ Whole Time Directors (WTDs), without seeking prior approval of RBI, subject to certain conditions.
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, RBI has specified that for the purposes of the said Section, the following loans/advances granted to the CEO / WTDs will not be considered as 'loans and advances':
i. Loan for purchasing of car
ii. Loan for purchasing of personal computer
iii. Loan for purchasing of furniture
iv. Loan for constructing/acquiring a house for personal use
v. Festival advance
vi. Credit limit under credit card facility
As per this circular, apart from the types of loans mentioned in this circular (specified loans/advances), no other loan can be sanctioned by the banks to its Directors.
Prior to this circular, for availing this exemption, banks were required to approach RBI for prior approval, except in case of loans granted to a Director who was an employee of the bank immediately prior to his/her appointment as a Director.
In order to obviate the need to approach RBI, the Regulator, vide this circular, allowed commercial banks to grant loans and advances to the CEO/WTDs, without seeking prior approval of RBI, subject to the following conditions:
a) The loans and advances shall 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.
b) 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.
It has also been clarified that the banks, at its own discretion, review the terms and conditions of currently outstanding loans granted to the CEO /WTDs in order to address transition issues.
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