The Telegraph
Since 1st March, 1999
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RBI stricture on FI loans

Mumbai, Dec. 21 (PTI): In a move to obviate the conflict of interest in lending operations of financial institutions (FI), the RBI today directed them “not to grant” loans or advances on the security of its own shares or enter into any commitment on behalf of their directors in which they may have interests.

FIs or their subsidiaries should not grant loans to a director who has links with an individual, who is a partner or a guarantor of the concerned director, the central bank said in a notification to the FIs.

To address the issue of reciprocal arrangements among the FIs and banks for extending credit and non-funded facilities, awarding contracts to each others directors or their kin, the RBI said FIs should not grant loans of Rs 25 lakh and above to any director who “holds substantial interest or is interested as one or as a guarantor”.

The RBI made it clear that unless the board or management committee sanctions, the FIs should also not grant loans and advances aggregating Rs 25 lakh and above to any relatives of the FI’s chairman and managing director or other directors.

RBI said proposals for less than Rs 25 lakh may be sanctioned by the appropriate authority but the FI should report the matter to the board.

Where any loan or advance has not been repaid to the FI within the stipulated period, such person shall, if he is a director on the date of expiry of the aforesaid period, is deemed to have vacated his office, it said.

On extending guarantees and establishing letters of credit on behalf of its directors, the RBI said in the event of default by the principal debtor, the FI would have to honour their obligations and the relationship between the FI and the director could become one of a creditor and a debtor.

The apex bank further said the FI will not be called upon to grant any loan or advance to meet the liability consequent upon the invocation of guarantee or devolvement of letters of credit and no liability would devolve on the FI.

With reference to loans and advances to relatives of the FI directors or them, RBI said such loans should not be granted except to the extent permitted in the guidelines laid down by it. No loan or advance or any liability of the borrowers availed from FIs, shall be remitted without RBI’s prior approval and any remission without such approval shall be void and of no effect, it said.

The apex bank pointed out that anybody directly connected or interested in any proposal should disclose the nature of his interest to the board when any such proposal is discussed and should not be present in the meeting unless his presence is required.

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