(i) The definition of banking in section 5(b) of Banking Regulation Act indicates that acceptance of deposits may be for lending and investment. Thus lending or making of loans and advances is a core business of a banking company. Lending may be for short term or long term, on secured or unsecured basis and for different purpose.
(ii) Regulation of Loans and Advances:
(a) The reserve is empowered under 21 of the Banking Regulation Act to issue directions to control advances by banking companies. Apart from this, the general powers to give directions under Section 35A are also available for regulation of loans and advances.Such directions may be issued to banking companies generally or to any particular company. The reserve Bank may determine the policy in relation to advance and issue directions when it is satisfied that it is necessary to give directions
(i) In public interest (ii) In the interest of depositors
(iii) In the interest of banking policy
(b) The direction given by Reserve Bank are binding on banking companies, and may be on one or more of the following matters:
(i) Purpose for which advances may or may not be made.
(ii) Margins, to be maintained in respect of secured advances.
(iii) Maximum amount of advances or other financial accommodation which may be made to any company, firm, association of persons or individual. The policy on these matters may be specified having regard to the paid-up capital, reserves and deposits of the Banking company and other relevant consideration.
(iv) Maximum amount up to which guarantees may be given by a banking company on behalf of any company, form, association of persons or individual. In this case, also the paid-up capital, reserves, deposits and other relevant considerations have to be taken in to account for determining the maximum amount.
(v) Rate of interest and other terms and conditions on which advances and other financial accommodation may be made or guarantees may be given.
(iii) Restriction on loans and advances: Section 20 of the Banking Regulation Act impose certain restriction on loans and advances. accordingly no banking company shall grant loans or advances on the security of its own shares. Further, a banking company, is prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors. The prohibition also applies to loans and advances to: (a) firms in which any director is interested as a partner, manager, employee or guarantor, and
(b) any company (other than a company register under Section 25 of the companies Act) in which a director of a banking company holds substantial interest as defined in Section 5(ne) of the Act or of which he is director, manager, managing agent, employee or guarantor.
If the director(including member of any board for managing or advising the bank regarding management) of a banking company is a partner or guarantor of any individual, loans and advances to such individual are also barred. If there is any doubt or dispute as to whether a transaction is a loan or advance, the decision of the Reserve Bank in the matter shall be final.
(iv) Restriction on power to remit debit: For remitting any debt to its directors, a banking company requires prior permission of the Reserve Bank under Section 20A of the Banking Regulation Act. Permission is also required for remission of loans to:
(a) any firm or company in which a director is interested as director, partner, managing agent, or
(b) any individual for whom a director is partner or guarantor. Any remission made in contravention of Section 20 is void and will have no effect.
(ii) Regulation of Loans and Advances:
(a) The reserve is empowered under 21 of the Banking Regulation Act to issue directions to control advances by banking companies. Apart from this, the general powers to give directions under Section 35A are also available for regulation of loans and advances.Such directions may be issued to banking companies generally or to any particular company. The reserve Bank may determine the policy in relation to advance and issue directions when it is satisfied that it is necessary to give directions
(i) In public interest (ii) In the interest of depositors
(iii) In the interest of banking policy
(b) The direction given by Reserve Bank are binding on banking companies, and may be on one or more of the following matters:
(i) Purpose for which advances may or may not be made.
(ii) Margins, to be maintained in respect of secured advances.
(iii) Maximum amount of advances or other financial accommodation which may be made to any company, firm, association of persons or individual. The policy on these matters may be specified having regard to the paid-up capital, reserves and deposits of the Banking company and other relevant consideration.
(iv) Maximum amount up to which guarantees may be given by a banking company on behalf of any company, form, association of persons or individual. In this case, also the paid-up capital, reserves, deposits and other relevant considerations have to be taken in to account for determining the maximum amount.
(v) Rate of interest and other terms and conditions on which advances and other financial accommodation may be made or guarantees may be given.
(iii) Restriction on loans and advances: Section 20 of the Banking Regulation Act impose certain restriction on loans and advances. accordingly no banking company shall grant loans or advances on the security of its own shares. Further, a banking company, is prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors. The prohibition also applies to loans and advances to: (a) firms in which any director is interested as a partner, manager, employee or guarantor, and
(b) any company (other than a company register under Section 25 of the companies Act) in which a director of a banking company holds substantial interest as defined in Section 5(ne) of the Act or of which he is director, manager, managing agent, employee or guarantor.
If the director(including member of any board for managing or advising the bank regarding management) of a banking company is a partner or guarantor of any individual, loans and advances to such individual are also barred. If there is any doubt or dispute as to whether a transaction is a loan or advance, the decision of the Reserve Bank in the matter shall be final.
(iv) Restriction on power to remit debit: For remitting any debt to its directors, a banking company requires prior permission of the Reserve Bank under Section 20A of the Banking Regulation Act. Permission is also required for remission of loans to:
(a) any firm or company in which a director is interested as director, partner, managing agent, or
(b) any individual for whom a director is partner or guarantor. Any remission made in contravention of Section 20 is void and will have no effect.
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