RBI revises limit for extending personal loans to directors of other banks

The Reserve Bank of India has raised the limit on loans to be sanctioned to directors or associates without board approval for the first time in 26 years to Rs. 5 crore from Rs. 25 lakhs last set in 1996. This revision in threshold will be applicable to only personal loans disbursed to any director of other banks, all loans to relatives of bank’s own directors, relatives of directors of other banks, and the companies or firms associated with them.

“On an examination of the issues, it was felt that the threshold of Rs 25 lakh which was fixed way back in 1996, needed an upward revision to reflect the increase in general prices since that time, encourage professionals with expertise to join the boards and reduce the cases requiring approval at the board & management committee level without diluting the regulatory intent, accordingly, it has been decided to raise the threshold to Rs 5 crore,” the RBI said in a statement.

Considering the sensitivity of the issue and to ensure that the directors continue to carry out their functions without being influenced, the increased threshold will only to applicable to personal loans for directors of other banks while the limit of Rs 25 lakh will continue to apply for business loans, the regulator noted.

The RBI also relaxed rules for grant of loans to companies where relatives of bankers are directors. The sanction of board or management committee would be required only when the relative is a major shareholder in a company (which is defined as holding of 10% or more of paid-up share capital or five crore rupees in paid up shares, whichever is less).

“Currently, sanction by the board and management committee for grant of loans to a company is required, where the relative of a director holds substantial interest which is defined as 10% of paid-up capital or Rs 5 lakh, whichever is less,” the RBI said. “This places a disproportionate burden on the board/ management committee.”