MUMBAI : The Reserve Bank of India allowed banks to grant loans and advances to their chief executive officers and whole-time directors without seeking the regulator’s prior approval as long as the funds are part of a board-approved compensation policy.
While the Base Rate guidelines will not apply to the interest charged on these loans, the RBI said the rate charged could not be lower than that on loans to the bank’s other employees.
“The terms and conditions of the loans granted to the Chief Executive Officer/Whole Time Directors which are currently outstanding may, at the banks’ discretion, be reviewed in the light of the above guidelines in order to address transition issues,” the RBI said.
The central bank said it was reviewing the guidelines to eliminate the need to approach the RBI on a case-to-case basis, and to streamline processes. Banks earlier needed the RBI’s prior nod to disburse loans or advances to their chief executive officers and whole-time directors, except in cases where the person concerned was an employee of the bank immediately prior to his or her appointment as director.
As per the Banking Regulation Act, 1949, banks are permitted to give loans to their directors only if they are for purchasing a car, a personal computer, furniture, or for constructing or buying a house for personal use. Festival advances and credit limit under the credit card facility are also permitted. However, no other loans are permitted.
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Rules for equity investments by banks relaxed with riders
MUMBAI : Making equity investments for banks easier, the Reserve Bank of India said banks having a capital adequacy ratio of over 10% and a net profit in the previous financial year do not need prior approval for such investments, as long as their total stake in the company remains below 10%.
RBI said the move was aimed at providing “more operational freedom and flexibility in decision making”. The RBI has given the same leeway to banks, along with subsidiaries and associates, to hold a maximum of 20% stake in the company being invested into. Earlier, banks did not need RBI’s prior approval only in cases where a bank made such investments under the ‘held for trading category’, which refers to investments not exceeding 90 days.
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