Limit on loan to bank directors hiked
The Reserve Bank of India (RBI) on Friday increased the limit on personal loans given to a director of a bank to ~5 crore from ~25 lakh earlier.
The central bank amended the master circular for this, and said unless sanctioned by the board of directors or the management committee, banks should not grant loans and advances aggregating ~5 crore and above to any relative other than spouse and dependent children of their own chairmen/managing directors or other directors.
This also extends to firms in which any relative other than spouse or dependent children is interested as a partner or guarantor.
Any credit facility given to the directors and their relatives have to be sanctioned by the appropriate authority in the financing bank, and the matter has to be reported to the board, the RBI said. However, board approval would be needed for loans given to major shareholders of the bank, or his relatives, where the shareholder holds more than 10 per cent in the bank.
According to a senior banker, the loan limit of ~25 lakh was fixed way back in 1996, and had to be updated to reflect the increase in general prices since then. All loans given to directors and their relatives are considered personal loans by the bank.
A higher personal loan limit may also encourage professionals with expertise to join bank boards. Such an increase in limits also cuts an administrative process in the bank where the director had to seek board approval for seeking personal loans.
“The amount may seem high for a personal loan, but it is the upper limit. Many CEOS have compensation that are more than ~5 crore a year,” said a senior banker requesting anonymity.
“A director of a bank cannot seek loans from other banks for his personal needs. But ~25 lakh was too low an amount, and therefore, banks had asked the RBI to increase the limit,” said the banker.
The ~25 lakh limit will continue for directors of other banks, and their relatives, according to the master circular.
The change applies to all scheduled commercial banks, except regional rural banks, small finance banks, and all local area banks.