The Reserve Bank of India on Friday increased the limit of personal loans given to any director of a bank to Rs 5 crore, from Rs 25 lakh earlier.
The central bank amended the master circular for this, and said unless sanctioned by the board of directors or the management committee, banks should not grant loans and advances aggregating Rs 5 crore and above to any relative other than spouse and dependent children of their own Chairmen/Managing Directors or other Directors.
This also extends to firms in which any relative other than spouse or dependent children is interested as a partner or guarantor.
Any credit facility given to the directors and relatives of directors have to be sanctioned by appropriate authority in the financing bank, and the matter has to be reported to the board, the RBI said. However, board approval would be needed for loans given to major shareholders of the bank, or his relatives, where the shareholder holds more than 10 per cent in the bank.
According to a senior banker, the loan limit of Rs 25 lakh was fixed way back in 1996, and needed updating to reflect the increase in general prices since then. All loans given to directors and their relatives are considered personal loans by the bank.
A higher personal loan limit may also encourage professionals with expertise to join bank boards. Such an increase in limits also cut an administrative process in the bank where the director had to seek board approval for seeking personal loans.
“The amount may seem high for a personal loan, but it is the upper limit. Many CEOs have compensation that are more than Rs 5 crore a year,” said a senior banker requesting anonymity.
“A director of a bank cannot be seeking loans from other banks for his personal needs. But Rs 25 lakh was too low an amount, and therefore, banks had sought RBI to increase the limit,” said the banker.
The Rs 25-lakh limit will continue for directors of other banks, and their relatives as per the master circular.
The increased limits apply to all scheduled commercial banks, except regional rural banks, small finance banks and all local area banks.