1 Loans & AdvancesStatutory/Regulatory Restrictions Structure
OBJECTIVES
Learning about Statutory Restrictions under BR ACT on loans and advances. Knowing Regulatory Norms of RBI on advances to certain sectors.
1. INTRODUCTION
Statutory restrictions refer to the limitations imposed on banks by laws such as the Banking Regulation Act, 1949—which govern lending practices, including restrictions on loans to directors, limits on exposure to a single borrower or group, and maintenance of capital adequacy. Regulatory restrictions, on the other hand, are guidelines or directions issued by regulatory bodies like the Reserve Bank of India (RBI), covering prudential norms, sectoral exposure limits, priority sector lending requirements, and risk-based supervision to ensure financial system stability. Other aspects related to lending include due diligence procedures, credit appraisal standards, adherence to Know Your Customer (KYC) norms, ensuring enduse monitoring, and maintaining documentation and collateral security—all essential for safeguarding bank assets and minimizing credit risk.
A. For SCBs
( i ) Scope of Norms
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a ) Aim: Lending activities run on sound, prudent and profitable lines.
( b ) For all SCBs (except RRBs), Separate norms for UCBs.
( ii ) Statutory Restrictions
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a ) Advances against bank’s own shares
( b ) Advances to bank’s Directors
( c ) Holding Shares in Companies
( d ) Credit to Companies for Buy-back of Securities
( iii ) Regulatory Restrictions
(1) Loans & advances to relatives of Directors
(2) Loans & Advances to Officers & Relatives of Senior Officers of Banks.
(3) Financial assistance to Industries producing/ consuming Ozone depleting substances (ODS).
(4) Advances against Sensitive Commodities under Selective Credit Control (SCC).
(5) Payment of commission to staff members including officers.
(6) Offering incentives on any banking products.
(7) Loans & Advances against Shares, Debentures & Bonds.
(8) Advances against FDRs issued by other banks.
(9) Advances to Agents/Intermediaries based on Deposit Mobilisation.
(10) Loans against CDs.
(11) Finance for & loans/advances against Indian Depository Receipts (IDRs).
(12) Bank Finance to NBFCs.
(13) Financing Infrastructure/Housing Projects.
(14) Issue of BGs favouring FIs.
(15) Discounting/Rediscounting of Bills by Banks.
( iv ) Other Aspects of Lending
( a ) Transfer of borrowal accounts from one bank to another
B. For UCBs
( i ) Statutory Restrictions
( a ) Advances against Bank’s Own Shares
( ii ) Regulatory Restrictions
(16) Advances for purchase of gold & lending against gold Bullion/coins/Primary gold.
(17) Advances against Gold Ornaments & Jewellery.
(18) Gold (Metal) Loans.
(19) Loans & advances to Real Estate Sector.
(20) Loans & advances to Micro & Small Enterprises (MSEs).
(21) Loan system for delivery of bank credit.
(22) Lending under consortium arrangement/ multiple banking arrangement.
(23) Working Capital Finance to IT & Software Industry.
(24) Guidelines for bank finance for PSU disinvestments of Govt. of India.
(25) Grant of Loans for acquisition of KVPs.
(26) 7% Savings Bonds, 2002; 6.5% Savings Bonds 2003 (Non-Taxable) and 8% Savings (Taxable) Bonds 2003- Collateral Facility.
(27) Guidelines on Settlement of NPAs- Obtaining Consent Decree from Court.
(28) Project Finance Portfolio of Banks.
(29) Bridge loans against receivables from Govt.
(30) FB/NFB credit Facilities to Overseas JV/ WoS Abroad & overseas SDS of Indian Companies.
( b ) Guidelines on Fair Practices Code for Lenders
(1) Granting Loans & Advances to Directors & their Relatives
(2) Maximum Ceiling on Advances to Nominal Members
(3) Advances against FDRs issued by Other Banks
( b ) Restrictions on Power to Remit Debts
(6) Loans & Advances against Shares, Debentures & Bonds
(7) Bank Finance against Preference Shares & Long Term (Subordinated) Deposits
(8) Bank Finance to NBFCs
(4) Advances by Salary Earners’ Primary (Urban) Co-operative Banks (SEBs) against Term Deposits of Non-members
(5) Bridge Loans/Interim Finance
(9) Financing Equipment Leasing & Hire Purchase Financing
(10) Financing for Agricultural Activities
(11) Loans to SHGs/JLGs
2. STATUTORY RESTRICTIONS
Main Aspect
Key Points
( i ) Advances against bank’s own shares No loan against bank’s own shares. (Sec.20(1) BR Act). (Both SCBs & UCBs)
( ii ) Loans and Advances to bank’s Directors – Restrictions (SCBs)
( iii ) Restrictions on Power to Remit Debts. (For UCBs)
( a ) Not to commit to grant loan of any nature to or on behalf of the directors and firms in which such directors have substantial interest. (Sec.20(1) BR Act).
( b ) Exceptions: RBI specified facilities not included in loans & advances.
(
(
c ) If required to meet obligations under LC/BG – it will violate BR Act.
d ) Foreign bank branch in India cannot lend to a firm/company in India in which a director on its Board abroad has an interest.
( a ) Sec. 20A(1) BR Act (as applicable to Co-operative Societies).
( b ) Prior RBI approval to remit any debt due by past/present director, firm or company in which interested, an individual if his partner/guarantor.
( iv ) Holding Shares in Companies. (For SCBs)
( a ) For loans against shares - restrictions on holding in other companies. (Sec. 19(2)/19(3) of BR Act)
( v ) Credit to Companies for Buy-back of their Securities (For SCBs) Loans to companies for buy-back of shares/securities not permitted. (Restrictions on companies – Companies Act, 2013)
3. REGULATORY RESTRICTIONS
A. For SCBs
Main Aspect Key Points
( i ) Granting loans and advances to relatives of Directors
( a ) Applicable to:
(1) Relatives of own Chairman/MD/Directors.
(2) Directors/Chairman/MD of other banks (also Sch. Coop. banks) & their relatives.
(3) Directors of Subsidiaries/Trustees of MFs/VCFs set up by any bank.
(4) ‘Relative’ as specified by RBI.
Main Aspect
Key Points
( b ) Sanction by Board/Management Committee interested in as specified by RBI.
(2) Credit facilities to such borrowers < Rs. 5 crore report to the Board.
(3) Chairman/MD/Director to disclose interest in any proposal to the Board.
(4) Declaration from every borrower regarding interest of any such persons.
( ii ) Loan to Officers and Relatives of Senior Officers of Banks
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a ) Loans & advances to officers of the bank.
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b ) Loans & advances & contracts to relatives of senior officers
( iii ) Other Restrictions/Provisions
( a ) Prohibition: Producing/Consuming ODS
( b ) Restrictions: SCC Commodities
( c ) Commission to staff
( d ) Incentives on banking products
( e ) Desist from linking loans with Deposits
( iv ) Loans against specified collateral
( a ) Loans & Advances against Shares, Debentures & Bonds
(1) An officer/Committee not to sanction loan to a relative.
(2) To be sanctioned by next higher authority.
(3) Credit facilities to senior officers report to Board.
(1) Loans/contracts to specified individuals or entities be reported to Board.
(2) Consortium: applicable to association with any participating bank.
(3) ‘Senior officer’ as prescribed by RBI.
(1) New units consuming/producing ODS.
(2) Small/medium units mfg. aerosol using CFC.
(1) To prevent speculative hoarding of essential commodities
(2) Specific restrictions - advances against specified items
(1) No employment on commission.
(2) Non-staff; May pay commission.
(3) No commission to staff for recovery.
(1) No prizes/lottery, etc. & incentive with element of chance for any banking product.
(2) Inexpensive gifts of up to Rs. 250/- allowed.
(1) Resources through agents/intermediaries to meet credit needs of borrowers.
(2) Granting loans to intermediaries - based on deposit mobilisation.
Guidelines applicable to advances against shares/debentures/bonds. (Refer Unit IV/2)
( b ) Advances against FDRs Issued by Other Banks Such advances prohibited.
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c ) Advances against NRE/FCNR (B) Deposits
Subject to guidelines issued under FEMA
UNIT 1 : LOANS & ADVANCES - STATUTORY/REGULATORY RESTRICTIONS 211
Main Aspect
( d ) Loans for KVPs
( e ) Specified Savings Bonds
( f ) Loans against CDs
( g ) For/against IDRs
( h ) Loans related to Gold
( i ) Loan against Gold Ornaments & Jewellery
( v ) Financing of Infrastructure Projects
Not allowed.
Key Points
( i ) Can be offered as collateral.
(1) Only against CDs held by MFs.
(1) No loan for subscription to IDRs.
(1) Not permitted for purchasing gold.
(2) WC facilities to jewellers allowed.
(3) Gold (Metal) Loan scheme continues.
(1) Loan/Value (non-agri.): Max. 75%.
(2) Value as per prescribed procedure.
( ii ) Facility only to the holders.
(2) To equity-oriented MFs –part of CME.
(2) No loan against IDRs issued in India.
(4) No loan against bullion/ primary gold.
(5) Loan against gold coins allowed.
(6) No loans to silver bullion dealers.
(3) Tenor (non-agri.): Max. 12 months.
(4) Considering hallmarked jewellery.
(For details refer RBI Cir. Financing of Infrastructure - Definition of ‘Infrastructure Lending’ dt. 28/6/2013)
(1) Infrastructure Lending (1) Infrastructure lending: Credit facility to a borrower for exposure in the infrastructure sub-sectors: (in the Master List notified by GoI on 7/10/2013) qualify as ‘infrastructure lending’.
(2) Criteria: Technically feasible, financially viable and bankable, subject to conditions.
(3) Entities: Public sector projects, SPVs.
(4) Types of Financing: Regular finance; Take-out Finance; Inter-institutional Gtees; Financing promoter’s equity.
(5) Appraisal: Viability due diligence, SPV appraisal, Joint appraisal.
(6) Prudential requirements: Exposure limits, Risk weight - capital adequacy.
(7) May lead to asset – liability mismatches.
(8) Take-out financing: To enable asset-liability management, Agreement with IDFC/FI, Prior arrangement for transfer bank’s outstandings to IDFC/FI.
(9) Liquidity support - IDFC: Committed refinance after agreed period, credit risk with bank.
(10) Long Term Bonds Banks: min. 7-year maturity for infrastructure & affordable housing.
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(
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(
Main Aspect
Key Points
a ) Infrastructure Lending Credit facility to a borrower for exposure in the infrastructure sub-sectors: (in the Master List notified by GoI on 7/10/2013) qualify as ‘infrastructure lending’.
b ) Criteria for Financing (1) Technically feasible, financially viable and bankable.
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c ) Types of Financing
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d ) Appraisal
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(1) Regular finance. (2) Take-out finance.
(1) Due diligence: Viability.
(2) Appraisal of SPV.
(2) Public sector projects – conditions.
(3) Financing SPVs – conditions.
(3) Inter-institutional Gtees. (4) Financing promoter’s equity
(3) Joint appraisal
e ) Prudential Requirements (1) Credit exposure limits. (2) Capital adequacy – risk weights.
f ) Asset-Liability Mgmt. Likely asset – liability mismatches.
g ) Take-out financing/Liquidity support (1) Take-out financing arrangement – IDFC/FI.
(2) Pre-determined for transfer of bank outstandings.
(3) Liquidity support from IDFC – committed refinance.
(4) After say 5 years – credit risk to be with bank.
h ) Issue of Long Term Bonds by Banks (1) For lending to infrastructure/affordable housing projects.
(2) Minimum maturity of 7 years.
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vi ) Other Specific Credit Facilities
( a ) BG in favour of Financial Institutions (1) Board approved policy. (2) Robustness of FI’s risk management.
(3) Only to borrower customers. (4) Funded min.10% of Gtee. exposure.
( b ) RBI Permission for BG Co-acceptance/BG – under Buyer Line of Credit Schemes of FIs.
( c ) Lending against guarantees of banks/FIs
(1) An exposure on guaranteeing bank. (2) Guarantees in certain cases exempt from conditions.
( d ) Discounting/Rediscounting of Bills (1) Only for genuine transactions.
(2) LC related - with regular credit facilities.
( e ) To Inv ITs Permitted to lend, subject to conditions.
( f ) To MSEs - banking system.
(3) Rediscounting: bank discounted, or NBFCs –2-wheeler related.
(2) Provide WC: 20% of projected turnover.
UNIT 1 : LOANS & ADVANCES - STATUTORY/REGULATORY RESTRICTIONS 213
Main Aspect
( f ) To IT & Software Industry
( h ) Bridge Loans
( i ) Project Finance Portfolio
Key Points
(1) WC: Promoter, Mgmt. team, Infra.
(2) Promoters’ contribution: Reasonable
(1) Not for Central/State Govt receivables.
(2) Allowed:
- Fertiliser industry: subsidy under RPS.
- Exporters: receivables of DDP, IPRS.
(3) Collateral security: Where available.
(4) Tailor-made follow up system.
(3) Against other receivables: - Expected equity flows/issues –
- Proceeds of NCDs, ECBs, GDRs (as FDI).
(1) Modes for promoter contribution: Entire upfront, Part upfront – phases, Proportionate.
(2) Clear policy on Debt Equity Ratio – to be maintained at all times.
( vii ) Lending under Consortium Arrangement/Multiple Banking Arrangement
(For details refer to RBI Cirs. Lending under Consortium Arrangement/Multiple Banking Arrangements dt. 10/2/2009, 8/12/2008, 19/9/2008)
( a ) Frauds involving such arrangements - lack of effective sharing of information among various banks.
( b ) Strengthen information back-up about borrowers enjoying credit facilities from multiple banks.
( viii ) Other Loan Provisions
( a ) Loan system: bank credit
(1) Borrowers with WC
(2) Normal loan component to be 80%. persuade.
(4) May exempt: cyclical/seasonal business.
( b ) Settlement of NPAs Suit-filed matters to advise Court – get Consent Decree.
B. For UCBs
Main Aspect
( i ) Loans to Directors & their Relatives
Key Points
( a ) Prohibited loans to Directors, their relatives, entities in which interested.
( b ) These persons/entities – not to be guarantor for loans by bank.
( c ) Certain loan facilities exempted.
( d ) Quarterly information to RBI.
Main Aspect
( ii ) Advances to Nominal Members
Key Points
( a ) Loans for short period or consumer durables.
( b ) Ceiling per borrower as per bank deposit level.
( iii ) Salary Earners’ UCBs Loans against TD of Non-members allowed, on conditions.
( iv ) Against Shares, Debentures & Bonds, MFs (1) To Individuals: Specified margins, individual ceilings. (2) Prudential exposure ceiling.
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v ) To NBFC– Leasing/HP allowed.
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(
(2) Registrar approval: NBFCLHP member.
v ) To NBFCs by Sch UCBs (1) Bill rediscounting: CVs, 2-wheelers, 3-wheelers.
(2) On-lending PSL: SRWTO for trucks, farmers, HP schemes for agri. machine, MSEs.
vi ) Eqpt. Leasing/HP (1) Subject to conditions allowed. (2) Non-scheduled UCB: RBI permission.
( vii ) Loans to (SHGs/JLGs) (1) Board Policy, RBI Guidelines. (2) Not through intermediaries.
( viii ) Prohibited loans (1) Advances against FDRs of other banks.
(2) Loans to non-employees by SEBs. (3) Bridge Loans/Interim Finance.
(4) To stock/commodity brokers.
(5) Against Pref. Shares & LT (Sub.) Bonds
(6) To NBFCs – Except as permitted.
4. OTHER ASPECTS RELATED TO LENDING
Main Aspect
( i ) Transfer of borrowal accounts from one bank to another
Key Points
( a ) Board approved policy (1) To include norms for various aspects. (2) Staff accountability quick mortality.
( b ) Before taking over Get credit information - Prescribed format from transferor bank.
( ii ) Guidelines on Fair Practices Code for Lenders
(For details refer RBI Cirs. Fair Practices Code for Lenders dt. 29/4/2024, 5/5/2003, Fair Lending Practice dt. 29/12/2023, 18/8/2023)
( a ) Own FPC - Lenders
( b ) Stipulated aspects
(1) To be approved by the Board. (2) Include specified aspects.
(1) Loan applications & processing.
(2) Loan appraisal & terms/ conditions.
(5) Penal charges in loan accounts.
(6) General: Dealing with borrower.
(3) Loan disbursement & changes in T&C. (4) Post disbursement supervision.
UNIT 1 : LOANS & ADVANCES - STATUTORY/REGULATORY RESTRICTIONS 215
Main Aspect
( iii ) Guidelines on Recovery Agents (RA) engaged by banks
Key Points
(For details refer RBI Cirs. Recovery Agents engaged by banks dt. 24/4/2008, Guidelines on Managing Risks & Code of Conduct in Outsourcing of Financial Services by banks dt. 3/11/2006)
( a ) Due diligence process for engaging.
( b ) Inform borrower RA details in default cases.
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c ) Notice/authority letter: Telephone numbers.
( iv ) Furnishing of Credit Information to CICs
( d ) Recording calls between RA & customers.
( e ) Inform customer about recording.
( f ) Updated details of RAs on the bank’s website.
((For details refer RBI Cirs. - Submission of Credit Information to CIB dt. 4/6/2002; Submission of data to CICs dt. 13/2/2012, 5/9/20116/9/2010, 9/8/2010,; Membership of CICs dt. 15/1/2015, 18) Data Format for Furnishing of Credit Information to CICs & other Regulatory Measures dt. 13/12/2022, 14/10/2021, 12/3/2021, 9/7/2015, 15/7/2014, 27/6/2014, 14/12/2010; Frequency of reporting of credit information by CIs to CICs dt. 8/8/2024; Data Quality Index for Commercial and Microfinance Segments by CICs dt. 20/9/2023; Strengthening of customer service rendered by CICs & Credit Institutions dt. 26/10/2023; Free Annual Credit Report to Individuals dt. 1/9/2016; Framework for compensation to customers for delayed updation/rectification of credit information dt. 26/10/2023; CICs (Regulation) Act, 2005 dt. 3/12/2009, 1/12/2009, 23/10/2009, 20/10/2009)
( a ) CICs approved by RBI (1) CIBIL (Jan. ‘01). (2) Experian (Feb. ‘10)
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b ) Duties of Credit Institution (CI)
(1) Become a member of all CICs.
(2) Provide credit data –prescribed format.
(3) Update credit information fortnightly, at least.
(3) Equifax (Mar. ‘10)
(4) High Mark (Dec. ‘10)
(4) Qly. List: Suit filed (also wilful defaulters).
(5) To furnish Credit Report to customer on request.
(6) Grievance redressal.
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c ) Duties of CICs (1) Alerts CIR of customer accessed by a Specified User.
(2) Provide once a year free Full Credit Report.
(3) Opportunity to seek rectification of errors.
( d ) Framework - resolution of complaints
(
(1) Compensation to complainants, if delayed.
(2) Not satisfied can approach: RBI Ombudsman, CEPC, RO, RBI.
e ) Measures by RBI (1) Based on Aditya Puri Committee (2014).
(2) Creating awareness about CICs.
(3) CI to use CIRs in all Lending Decisions.
(4) Standardisation of Data Format.
(5) NCLT/NCLAT cases as suit-filed.
(6) Common Data Quality Index.
(7) Common classification of Credit Score.
(8) Standard format of CIR.
5. LET US SUM UP
Certain restrictions included in the BR Act, and RBI has advised restrictions basis persons, purposes and security.
Banks cannot lend against own shares. Ceiling on holding equity of other companies as owner or pledgee. Restrictions related to loans to bank Directors, Senior Officers.
Restrictions on loans of following nature: Loans against shares, debentures, and bonds; Loans against FDs of other banks; Against CDs; To Agents/intermediaries against deposit mobilized; Infrastructure/Housing projects; Bills discounting/rediscounting; Against gold, bullion, jewellery, silver jewellery; Information Technology and Software Industry; Real Estate, Micro and Small Enterprises.
Provisions for: Loans for PSU Disinvestments of Government of India; Bridge loans for certain purposes.
Provisions for: Loan delivery system, Lending under consortium arrangement; Transfer of borrowal accounts to another bank; Fair practice code of lenders.
6. CHECK YOUR PROGRESS
1. Which of the following commodities are under RBI stipulations as sensitive.
( a ) Levy Sugar
( b ) Cotton
( c ) Foodgrains
( d ) Textiles
2. Choose the incorrect option
( a ) Bank can grant loans against gold coins
( b ) Banks cannot grant loans against certificate of deposits (CDs) except that to Mutual Funds
( c ) No bank should grant any loan/advance for subscription to Indian Depository Receipts (IDRs)
( d ) Banks may sanction advances against FDRs, or other term deposits of other banks
7. KEY TO ‘CHECK YOUR
REFERENCES
A. Master Directions/Circulars
(1) RBI Master Circular on Exposure Norms and Statutory/Other Restrictions - UCBs dated January 16, 2024.
B. Various Matters – Loans and Advances
(2) RBI Circular No. DOR.CRE.REC.No. 33/13.03.00/2021-22 dated July 23, 2021. - Loans and Advances – Regulatory Restrictions
C. Consortium/Multiple Banking Arrangements
(3) RBI Circular No. DBOD. No. BP.BC.110/08.12.001/2008-09 dated February 10, 2009Lending under Consortium Arrangement/Multiple Banking Arrangements.
D. FPC – Lenders Related
(4) RBI Circular No. DoS.CO.PPG.SEC.1/11.01.005/2024-25 dated April 29, 2024 - Fair Practices Code for Lenders – Charging of Interest.
RBI Circular No. DoR.MCS.REC.61/01.01.001/2023-24 dated December 29, 2023Fair Lending Practice - Penal Charges in Loan Accounts: Extension of Timeline for Implementation of Instructions.
(5) RBI Circular No. DoR.MCS.REC.28/01.01.001/2023-24 dated August 18, 2023 - Fair Lending Practice - Penal Charges in Loan Accounts.
E. CICs Related
(6) RBI Circular No. DoR.FIN.REC.No.32/20.16.056/2024-25 dated August 08, 2024 on Frequency of reporting of credit information by Credit Institutions to Credit Information Companies.
(7) RBI Circular No. DoR.FIN.REC.48/20.16.003/2023-24 dated October 26, 2023 on Framework for compensation to customers for delayed updation/rectification of credit information.
(8) RBI Circular No. DoR.FIN.REC.49/20.16.003/2023-24 dated October 26, 2023 on Strengthening of customer service rendered by Credit Information Companies and Credit Institutions.
(9) RBI Circular No. DoR.FIN.REC.39/20.16.056/2023-24 dated September 20, 2023 on Data Quality Index for Commercial and Microfinance Segments by Credit Information Companies.
Rs. 1,425
