1. Guidelines -Restrictions on loans and advances

Statutory Restrictions

  • Bank cannot grant any loans and advances on security of one’s own shares.
  • Banks are prohibited from entering into any commitment for granting loans or advances to the following:
  1. To or on behalf of any of its Directors, or
  2. Firm or company or subsidiary or holding company -in which any of its directors is interested as partner, manager, employee, or guarantor, or
  3. A company /subsidiary/ holding in which director holds substantial interest or
  4. Individual in respect of whom any of its directors is a partner or guarantor.

  The term “Loans and advances” shall not include the following Loans and advances against:

  1. Government securities.
  2. Life insurance policies.
  3. Fixed deposits.
  4. Stocks and shares.
  5. Temporary Overdrafts upto Rs 25000
  6. Housing Loans, car advances etc granted to an employee under applicable employee’s scheme.

 Other Statutory Restrictions

  • As regards giving guarantees and opening of L/Cs on behalf of the bank’s directors, it is pertinent to note that in the event of the principal debtor committing default in discharging his liability and the bank being called upon to honour its obligations under the guarantee or L/C, the relationship between the bank and the director could become one of the creditor and debtor.
  • Further, it is possible for the directors to evade the provisions of Section 20 by borrowing from a third party against the guarantee given by the bank. Such transactions may defeat the very purpose of restrictions imposed under Section 20, if the bank does not take appropriate steps to ensure that the liabilities there under do not devolve on them. In view of the above, while extending non-fund based facilities such as guarantees, L/Cs, acceptance on behalf of directors and the companies/firms in which the directors are interested; it should be ensured that:
  1. Adequate and effective arrangements have been made to the satisfaction of the bank that the commitments would be met by the openers of L/Cs, or acceptors, or guarantors out of their own resources,
  2. The bank will not be called upon to grant any loan or advance to meet the liability consequent upon the invocation of guarantee, and
  3. No liability would devolve on the bank on account of L/Cs/ acceptances.
  4. Such contingencies arise as at (2) & (3) above, the bank will be deemed to be a party to the violation of the provisions of Section 20 of the Banking Regulation Act, 1949.
  • Restrictions on Holding Shares in Companies

While granting loans and advances against shares, statutory provisions as contained in Sections 19(2), Sections 19(3), of the Banking Regulation Act, 1949, should be strictly observed.

  • Restrictions on Credit to Companies for Buy- Back of their securities

In terms of provisions of the Companies Act, 2013, companies are permitted to purchase their own shares or other specified securities out of their

 

• Free reserves, or

• Securities premium account, or

• The proceeds of any shares or other specified securities, subject to compliance of various conditions specified therein. Therefore, banks should not provide loans to companies for buy-back of securities.

 

           Restrictions on Grant of Loans & Advances to Officers

and Relatives of Senior Officers of Banks

The statutory regulations and/or the rules and conditions of service applicable to officers or employees of public sector banks indicate, to a certain extent, the precautions to be observed while sanctioning credit facilities to such officers and employees and their relatives. In addition, the following guidelines should be followed by all the banks with reference to the extension of credit facilities to officers and the relatives of senior officers:

                                        

  1. Loans & advances to officers of the bank : No officer or any Committee comprising, inter alia, an officer as member, shall, while exercising powers of sanction of any credit facility, sanction any credit facility to his/her relative. Such a facility shall ordinarily be sanctioned only by next higher sanctioning authority. Such credit facilities sanctioned to senior officers should be reported to the Board.
  2. Loans and advances and award of contracts to relatives of senior officers of the bank:

Proposals for credit facilities to the relatives of senior officers of the bank sanctioned by the appropriate authority should be reported to the Board. Further, when a credit facility is sanctioned by an authority, other than the Board to –

  • any firm in which any of the relatives of any senior officer of the financing bank holds substantial interest, or is interested as a partner or guarantor; or
  •  any company in which any of the relatives of any senior officer of the financing bank holds substantial interest, or is interested as a director or as a guarantor, such transaction should also be reported to the Board.

 

  1. In the case of consortium arrangements, the above norms relating to grant of credit facilities to relatives of senior officers of the bank will apply to the relatives of senior officers of all the participating banks.
  2.  The term  “Senior Officer” will refer to :
  • Any senior management level officer in Grade IV and above in a nationalized bank.
  • Any officer of equivalent scale

                      In State bank of India and associate banks and in any banking company in India.

  1. The term Credit facility will not include Loans or advances against:
  1. Government securities.
  2. Life Insurance policies Fixed or other deposits.
  3. Temporary overdrafts for small amounts , upto 25000.
  4.  Casual purchase of cheques upto Rs 5000 at a time.
  5. Credit facility will also not include loans and advances such as housing loans, car advances, consumption loans etc, granted to an officer of the bank under the scheme applicable to officers.
  1.  Thus, banks may,
  • Evolve a procedure , to ascertain interest of the relatives of a senior officer of the bank, in any credit proposal placed before the Board committee
  • Obtain a declaration from every borrower:
  1. If he is an individual, that he is not specified , near relation to any senior officer of the bank,
  2. If it is a partnership /HUF firm, none of the partners/ members of the HUF, is a specified relation of any senior officer of the bank.
  3. Ensure declaration gives details of the relationship, of the borrower to any senior officer of the financing bank.
  4. Make a condition for the grant of any credit facility , if declaration is made by a borrower is found to be false, Bank may revoke the credit facility.
  5. Consider amendments , in consultation with the legal advisors , for dealing with the service conditions of bank to give effect to these guidelines . 

 

Restrictions on Grant of Financial Assistance to Industries Producing / Consuming Ozone Depleting Substances (ODS)       

  • Banks should not extend finance for setting up of new units consuming/producing the Ozone Depleting Substances (ODS).
  • No financial assistance should be extended to small/medium scale units engaged in the manufacture of the aerosol units using chlorofluorocarbons (CFC) and no refinance would be extended to any project assisted in this sector

Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC)

  • With a view to preventing speculative holding of essential commodities with the help of bank credit and the resultant rise in their prices, in exercise of powers conferred by Section 21 & 35A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, issues, from time to time, directives to all commercial banks, stipulating specific restrictions on bank advances against specified sensitive commodities.
  •  The commodities, generally treated as sensitive commodities are the following:
  1. food grains i.e. cereals and pulses,
  2. selected major oil seeds indigenously grown, viz. groundnut, rapeseed/mustard, cottonseed, linseed and castor seed, oils thereof, vanaspati and all imported oils and vegetable oils,
  3.  raw cotton and kapas,
  4. sugar/gur/khandsari,
  5. Cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics made out of man-made fibres and partly out of cotton yarn and partly out of man-made fibres.
  6. Banks are free to fix prudential margins on advances against these sensitive commodities. However, in case of advance against Levy Sugar, a minimum margin of 10% will apply.
  •   Valuation of sugar stocks
  1. The unreleased stocks of levy sugar , charged to banks as security             by sugar mills , shall be valued at levy price fixed by government.
  2. The unreleased stocks of free sale sugar including buffer stocks of sugar charged to the bank as security by sugar mills, shall be valued  at the average of the price, realized in previous 3 months or CMP, whichever is lower, exclusive of excise duty.

Restrictions on Payment of Commission to staff members including officers

  • Section 10(1)(b)(ii) of Banking Regulation Act, 1949, stipulates that a banking company shall not employ or continue the employment of any person whose remuneration or part of whose remuneration takes the form of commission or a share in the profits of the company.
  • Section 10(1)(b)(ii) permits payment of commission to any person who is employed only otherwise than as a regular staff.

 

Restrictions on offering incentives on any banking products

Banks should not offer any banking products, including online remittance schemes etc., with prizes /lottery/free trips (in India and/or abroad), etc. or any other incentives having an element of chance, except inexpensive gifts costing not more than Rs 250, as such products involve non-transparency in the pricing mechanism and therefore go against the spirit of the guidelines. Such products, if offered, by banks would be considered as violation of the extant guidelines and the banks concerned would be liable for penal action.

 

Restrictions on Loans and Advances against Shares, Debentures and Bonds

Advances to individuals

Conditions:

  1. Purpose of loan:  To meet contingencies, personal needs or for subscribing to new /rights issue of shares/ debentures/ bonds or purchase in the secondary market, against security of shares/ debentures/bonds held by individual.
  2. Amount of advance: Should not exceed Rs 10 lac per individual, if held in physical form & Rs 20 lac per individual, if securities are held in dematerialized form. Margin requirements against preference, non-convertible bonds and debentures, may be determined by banks themselves.
  3. Lending Policy: Banks should obtain declaration from borrower indicating extent of loan availed by him from other banks as input for credit valuation.It is also important to see that accommodation  from different banks is not obtained against shares of a single company.  As a prudential measure, each bank may consider laying sub-limits of such advances.

Restrictions on Advances to Share/Stock Brokers

  1. Banks should not undertake financing “Bala” transactions.
  2.  Share/stock Brokers may be provided need based overdraft facilities against shares and debentures held by them as stock in trade after making a careful assessment of need based requirements for such finance . Large scale investment on own account , should not be encouraged. Collateral securities  should be marketable.
  3. The celing of Rs 10 lacs /20 lacs , for advances against shares  wont be applicable in this case and advances will be need based.
  4. Banks may grant working capital facilities to SEBI registered stock brokers , who have compiled with SEBI registered ,CAR norms, to meet  cash flow gap between delivery and payment for DVP transactions, utilization of which will be monitored on individual basis.
  5. A uniform margin of 50% will be applied on all advances along with a minimum cash margin of 25% , w.r.t guarantees for capital market operations for all commodity brokers in favor of commodity exchanges and to stock brokers by way of temporary overdrafts for DVP transactions.
  6. Banks may issue gaurantees   in favor of stock exchanges in lieu of security deposit in form of BG, in lieu of margin requirements as per stock exchange requirements, after assessing requirement of each borrower including exposure ceilings.
  7. The requirement relating to transfer of shares in bank's name in respect of shares held in physical form , shall not apply in respect of advances, granted to share and stock brokers provided such shares are held as security for a period not exceeding 9 months.
  8. In the case of dematerialised shares, the depository system provides a facility for pledging and banks may avail themselves of this facility and in such cases there will not be need to transfer the shares in the name of the bank irrespective of the period of holding.
  9. The shares/ stock brokers are free to substitute shares , pledged by them, while in case of default , bank can get the shares transferred in their name.
  10. Every bank should lay down  general guidelines , for detailed loan policy along with a policy for grant of guarantees on behalf of brokers:
  • Purpose and use of such advances.
  • Pricing of such advances.
  • Control features that recognize the characteristics and risks of such financing.
  • Method of collateral valuation.
  • Frequency of shares and securities valuation taken as collateral, once in a quarter.
  • Guidelines  for share transfer in bank’s name.
  • Maximum exposure for individual credits
  • The aggregate portfolio should be reviwed and put up at least on a half-yearly basis to the Board.

General guidelines:

  • Statutory provisions should be strictly observed.
  • Banks should be concerned with what advances are for.
  • Advances against primary security of shares should be kept distinct and separate and not combined with any other advance.
  • Satisfaction regarding marketability of shares  along with networth and working of the company whose shares are offered as security.
  • Shares  should be valued at prevailing market prices.
  • Banks should exercise care when advances are sought against large blocks of shares by borrower.
  • No advance against partly paid share should be granted.
  • No loans to be granted to partnership concerns against primary security of shares.
  • When limits exceeds Rs 10 lacs, shares must be transferred in bank’s name and bank should have exclusive and unconditional right, w.r.t shares. Where securities are held in demat form, the requirement relating to bank transfer shall not apply , and banks can take decision on their own, i.e banks should avail the facility for pledging securities held in demat form while in case of default , the shares and debentures get transferred in bank’s name .
  • Banks can take their own decision with respect to voting rights
  • They should also ensure that scrips lodged as security are not duplicate/benami. Any irregularities should be reported to RBI.
  • BOD may decide authority for sanctioning advances against shares along with internal guidelines and safeguards for granting such advances.
  • A uniform margin of 50 per cent shall be applied on all advances / financing of IPOs / issue of guarantees on behalf of market makers. A minimum cash margin of 25 per cent (within the margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations

Restrictions on bank finance for Market Makers

Guidelines

  1. Market Makers approved by stock exchange would be eligible for grant of advances by scheduled commercial banks.
  2. Market Making may not only be for equity but also for debt securities including State and Central Government securities.
  3. Banks should exercise their commercial judgement in determining the need based working capital requirements of Market Markers by taking into account the Market Making operations.
  4. A uniform margin of 50 per cent shall be applied on all advances / financing of IPOs / issue of guarantees on behalf of market makers. A minimum cash margin of 25 per cent (within the margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations
  5. Banks may accept, as collateral for the advances to the Market Makers, scrips other than the scrips in which the market making operations are undertaken
  6. Banks should ensure that advances provided for Market Making are not diverted for investment in shares other than the scrip earmarked for Market Making purpose. For this purpose, a suitable follow-up and monitoring mechanism must be evolved.
  7. The ceiling of Rupees ten lakhs / Rupees twenty lakhs for advances against shares/debentures to individuals will not be applicable in the case of Market Makers

Advances to individuals against shares to Joint holders or third party

Banks should be circumspect and ensure that the objective of the regulation is not defeated by granting advances to other joint holders or third party beneficiaries to circumvent the above limits placed on loans/advances against shares and other securities.

Financing of Initial Public Offerings (IPOs)

  • Banks may grant advances to individuals for subscribing to IPOs. Loans/advances to any individual from banking system against security of shares, which should not exceed Rs10 lac for IPOs.
  • The corporate should not be extended credit by banks for investment in other companies’ IPOs.
  • Similarly, banks should not provide finance to NBFCs for futher lending to individuals for IPOs.

                 Bank Finance to assist employees to buy back their own shares

  • Banks may extend finance to employees for purchasing shares of their own companies under Employees Stock Option Plan (ESOP)/ reserved by way of employees’ quota under IPO to the extent of 90% of the purchase price of the shares or Rs. 20.00 lakh, whichever is lower.
  • Banks are not allowed to extend advances including advances to their employees/ Employees’ Trusts set up by them for the purpose of purchasing their own banks’ share under ESOPs/IPOs or from the secondary market.
  • This prohibition will apply irrespective of whether the advances are secured or unsecured.
  • Banks should obtain declaration from the borrower indicating the details of the loan/advances availed against shares, in order to ensure compliance with the ceilings prescribed for the purpose.
  • Follow on public Offers will also be included under IPO.

                    Advances to other borrowers against shares

  • The question of granting advances against Primary Security* of shares and debenture including promoters’ shares to industrial, corporate or other borrowers should not normally arise.
  • Such securities can be accepted as collateral for secured loans granted as working capital or for other productive purposes from borrowers other than NBFCs. In such cases , banks must accept shares in demat form.
  • In the course of setting up of new projects or expansion of existing business or for the purpose of raising additional working capital required by units other than NBFCs, there may be situations where such borrowers are not able to find the required funds towards margin, pending mobilisation of long term resources.
  • In such cases, no objection to banks for obtaining collateral security of shares by way of margin, which would be temporary in nature , and would continue beyond 1 year.

                   Bank Loans for Financing Promoters Contribution

  • The promoters’ contribution towards the equity capital of a company should come from their own resources and the bank should not normally grant advances to take up shares of other companies.
  • Banks are permitted to extend loans to corporates against the security of shares (as far as possible in dematerialised form) held by them to meet the promoters’ contribution to the equity of new companies in anticipation of raising resources subject to the following terms and conditions :
  1. The margin and period of repayment of the loans may be determined by the banks.
  2. Loans sanctioned to corporates against the security of shares (as far as possible, demat shares) for meeting promoters' contribution to the equity of new companies in anticipation of raising resources, should be treated as a bank’s investments in shares which would thus come under the ceiling of 40 percent of the bank's net worth as on March 31 of the previous year prescribed for the bank’s total exposure including both fund based and non-fund based to capital market in all forms. These loans will also be subject to individual/group of borrowers exposure norms as well as the statutory limit on shareholding.
  3. Banks may extend financial assistance to Indian companies for acquisition of equity in overseas joint ventures / wholly owned subsidiaries or in other overseas companies, new or existing, as strategic investment, in terms of a Board approved policy, duly incorporated in the loan policy of the banks.
  4. Such policy should include overall limit on such financing, terms and conditions of eligibility of borrowers, security, margin, etc, subject to compliance with the statutory requirements under Section 19(2) of the Banking Regulation Act, 1949.
  5. Under the refinance scheme of Export-Import Bank of India, the banks may sanction term loans on merits to eligible Indian promoters for acquisition of equity in overseas joint ventures / wholly owned subsidiaries, provided the term loans have been approved by the EXIM Bank for refinance.
  6. The restriction on grant of bank advances for financing promoters' contribution towards equity capital would also extend to bank finance to activities related to such acquisitions like payment of non-compete fee, etc which would also be applicable to bank finance to such activities by overseas branches / subsidiaries of Indian banks.
  7. With the approval of the Board of Directors, the banks should formulate internal guidelines with appropriate safeguards for this purpose .
  8. All the general guidelines as applicable to advances against shares will henceforth be applicable.

 

                   Advances against Units of Mutual Funds

                            Guidelines

  1. The Units should be listed in the Stock Exchanges or repurchase facility for the Units of mutual fund should be available at the time of lending.
  2. The Units should have completed the minimum lock-in-period stipulated in the relevant scheme.
  3. The amount of advances should be linked to the Net Asset Value (NAV) / repurchase price or the market value, whichever is less and not to the face value.
  4. Advance against units of mutual funds (except units of exclusively debt oriented funds) would attract the quantum and margin requirements as applicable to advance against shares and debentures.
  5. However, quantum and margin requirement for loans/ advances to individuals against units of exclusively debt-oriented mutual funds may be decided by individual banks themselves in accordance with their loan policy.
  6. The advances should be purpose oriented, taking into account the credit requirement of the investor. Advances should not be granted for subscribing to or boosting up the sales of another scheme of the mutual funds or for the purchase of shares / debentures / bonds etc.

 

                    Margin Trading

  • Banks may extend finance to stockbrokers for margin trading. The Board of each bank should formulate detailed guidelines for lending for margin trading, subject to the following parameters :
  1. Finance should be within the ceiling of 40% of the net worth.
  2. Minimum margin of 50% should be maintained on funds lent for margin trading.
  3. The shares purchased with margin trading should be in dematerialised mode under pledge to the lending bank. The bank should put in place an appropriate system for monitoring and maintaining the margin of 50% on an ongoing basis.
  4. The bank's Board should prescribe necessary safeguards to ensure that no "nexus" develops between inter-connected stock broking entities/ stockbrokers and the bank in respect of margin trading. Margin trading should be spread out by the bank among a reasonable number of stockbrokers and stock broking entities.
  5. The Audit Committee of the Board should monitor periodically the bank's exposure by way of financing for margin trading and ensure that the guidelines formulated by the bank's Board, subject to the above parameters, are complied with. Banks should disclose the total finance extended for margin trading in the "Notes on Account" to their Balance Sheet.

              Financing for Acquisition of Equity in Overseas Companies

  1. Banks may extend financial assistance to Indian companies for acquisition of equity in overseas joint ventures / wholly owned subsidiaries or in other overseas companies, new or existing, as strategic investment, in terms of a Board approved policy, duly incorporated in the loan policy of the banks.
  2. Such policy should include overall limit on such financing, terms and conditions of eligibility of borrowers, security, margin, etc. While the Board may frame its own guidelines and safeguards for such lending, such acquisition(s) should be beneficial to the company and the country. The finance would be subject to compliance with the statutory requirements under Section 19(2) of the Banking Regulation Act, 1949.

           Refinance Scheme of Export Import bank of India

  1. Under the refinance scheme of Export Import Bank of India (EXIM Bank), the banks may sanction term loans on merits to eligible Indian promoters for acquisition of equity in overseas joint ventures / wholly owned subsidiaries, provided that the term loans have been approved by the EXIM Bank for refinance.

 

           Arbitage Operations

  1. Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges.
  2. While banks are permitted to acquire shares from the secondary market, they should ensure that no sale transaction is undertaken without actually holding the shares in their investment accounts.

        Advances against FDRs Issued by other banks

  • There have been instances where fake term deposit receipts, purported to have been issued by some banks, were used for obtaining advances from other banks, as a result of which banks should desist from sanctioning advances against FDRs or other term deposits.

        Restrictions on advances against NR(E)RA and FCNR (B) Deposits - Quantum of 

         Loans –  Shall be subject to guidelines issued under FEMA, 1999.

 

       Advances to Agents/Intermediaries based on Consideration of Deposit

       Mobilisation

Banks should desist from being party to unethical practices of raising of resources through agents/intermediaries to meet the credit needs of the existing/prospective borrowers or from granting loans to intermediaries, based on the consideration of deposit mobilisation, who may not require the funds for their genuine business requirements.

 

      Loans against Certificate of Deposits (CDs)

Banks may lend against CDs and buy back their own CDs, until further notice, only in respect of CDs held by mutual funds, subject to the provisions of paragraph 44(2) of the SEBI (Mutual Funds) Regulations, 1996. Further, such finance if extended to equity-oriented mutual funds will form part of banks’ capital market exposure.

                            

Finance for and Loans/Advances against Indian Depository Receipts (IDRs)

  • No bank should grant any loan / advance for subscription to Indian     Depository Receipts (IDRs).
  • No bank should grant any loan / advance against security / collateral of IDRs issued in India.

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