STATUTORY & OTHER RESTRICTIONS ON LOANS & ADVANCES
BANKING & FINANCIAL SERVICES TERMPAPER

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2013
12/11/2013

STATUTORY & OTHER RESTRICTIONS ON LOANS & ADVANCES

Advances against bank's own shares:
A bank cannot grant any loans and advances on the security of its own shares.( Section 20(1) of the Banking Regulation Act, 1949)

Advances to bank's Directors :
Banks are prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any company/firm in which any of its directors is interested as partner, manager, employee or guarantor (B.R Act (Section 20(1).

‘Loans & advances’ include, among others:-
• Purchase of or discount of bills from directors and their concerns.
• Issuance of guarantees and opening of L/Cs on behalf of the bank’s directors.

Restrictions on Power to Remit Debts
A banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by any of its directors or any firm or company in which the directors are having interest or partner or guarantor. (Sec. 20A of BR Act)

Restrictions on Holding Shares in Companies
Banks should not hold shares in any company except as provided in sub-section whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less. (Section 19(2) of the Act)

The banks should not hold shares whether as pledge , mortgagee or absolute owner, in any company in the management of which any managing