List of Restrictions on Loans Issued By all Bank, Check Various Restrictions On Loans Issued by RBI. Banking means accepting deposits from the public for the purpose of lending or investment and is repayable on demand. A Banking Organization is the one which is engaged in banking activities in India. Merely accepting deposits for the purpose of the business shall not be regarded as a banking activity.
Every bank exists for the business of providing loans and earning interest thereon. Besides this, banks are also indulged in various other activities such as dealing in Bills of exchange, Hundis, Promissory notes, Advancing Money, Lending Money, Borrowing money, Raising Money, Providing Guarantee, acting as an agent of government, selling properties which came into its possession in settlement of a claim, Providing housing loan, Providing Investment Schemes, etc. However, no banking companies can directly or indirectly deal in buying or selling goods other than Bills of exchange.
We all know that primary activity for any bank is earning interest by providing loans. Banks are responsible for managing money of common public and thus it is their duty to use this money in such a way that their risk is minimized and appropriate return is earned so that the overall objective of customer satisfaction is achieved.
We have seen that the loans by bank may sometime become NPA’S .There are thousands of examples where we can see that people have done fraud with banks. Thus there are various norms and conditions which need to be followed to provide loans and advances. The purpose of these restrictions is to have good internal controls and achieve the confidence of common man.
Following are the restrictions imposed on loans made by banks:
- A bank cannot give loans or advances to any of its Directors.
- A bank cannot give loan to any firm in which any of its directors is a Partner.
- A bank cannot give loan to any firm in which any of its directors is a manager OR employee.
- A bank cannot give loan to any company or its subsidiaries in which any bank director is an employee, manager, director, and guarantor.
- A bank cannot give loan to any Individual if the director of bank is a partner, employee, manager or guarantor of that individual.
- Rate of Interest and other terms need to be in accordance with RBI policy.
- Bank should provide advances keeping in mind maximum amount that can be granted to an individual, company etc.
- Amount of guarantee on behalf of a particular individual, company should not exceed the limit as prescribed by RBI.
- In case of secured deposits, a % of security to be held should be in accordance with the RBI.
- Banking Companies, Nationalized Banks, SBI & its Subsidiaries cannot make loans on the security of its own shares as per section 20 of Banking Regulation Act.
- Banks cannot make finance for projects undertaken by public sector entities which are not corporate bodies
- Banks should not enter into leasing agreements with Non Banking Financial Companies engaged in equipment leasing.
- A bank should not provide finance for setting up any such institution which is engaged in production of Ozone Depleting Substances.
- A bank should not grant any loans against partly paid shares or certificate of deposits. Thus, a bank should grant loan only against fully paid shares.
These rules are to be necessarily complied with to safeguard the interest of banking companies and public at large.