What are the regulatory restrictions on bank lending?

In terms Banking Regulation Act, 1949, RBI provides a framework of the rules, regulations, and instructions with regard to bank lending. Accordingly it has issued following directions to scheduled commercial banks on statutory and other restrictions on loans and advances.

  • A bank cannot grant any loans and advances on the security of its own shares.
  • Enter into any commitment for granting any loan or advance to or on behalf of- (a) any of its Directors,(b) any firm in which any of its Directors is interested as Partner, Manager, Employee or Guarantor.
  • Under section 19 of Banking Regulation Act 1949, a bank cannot hold shares in a company as (a) pledgee or mortgagee in excess 30 percent of paid up of that company or 30 percent of bank’s paid capital and reserves whichever is less. (b) in the management of which Managing Director or Manager of the bank is interested.
  • Bank’s aggregate investment in shares, certificate of deposits, bonds etc. shall not exceed the 40 percent of banks owned funds as at the end of previous year.
  • A bank cannot grant credit facilities against Certificate of deposits, Term deposits issued by other banks or money market mutual funds.
  • Banks shall adhere to selective credit control directives of RBI while releasing loans against sensitive commodities.
  • Banks should not sanction a new or additional facility to borrowers appearing in RBI’s list of Wilful defaulters for a period of 5 years from the date of publication of the list by RBI.
  • There are certain restrictions on Grant of Loans & Advances or award contracts to Officers and Relatives of Officers of Banks. No officer or any Committee comprising, inter alia, an officer as member, shall, while exercising powers of sanction of any credit facility, sanction any credit facility to his/her relative. Such a facility shall ordinarily be sanctioned only by the next higher sanctioning authority. Credit facilities sanctioned to senior officers of the financing bank should be reported to the Board.

 Related article:

What is Selective Credit Control?

Surendra Naik

Share
Published by
Surendra Naik

Recent Posts

Understanding Leverage and Gearing

Leverage and gearing are financial terms that refer to the use of debt by a…

19 hours ago

Meaning of Capital Structuring of a Company

Capital structure is the combination of debt and equity used by a company to finance…

1 day ago

Overview: Global and Indian Forex Market

The foreign exchange market, or Forex Market (FX market), is a global decentralized over-the-counter (OTC)…

2 days ago

Calculation of forward exchange rates explained with the illustrations

A currency forward contract is a customized, written contract between two parties that sets a…

2 days ago

Basic Exchange Rate Arithmetic Explained with Illustrations

IntroductionBasic exchange rate arithmetic involves converting one currency to another using the exchange rate. The…

3 days ago

RBI Issues 5th Amendment to SNRR Account in the FEMA (Deposit) Regulation 2025

A Special Non-Resident Rupee (SNRR) Account is opened with Authorized Dealer (AD) banks in India…

3 days ago