RBI relaxes norms for banks’ equity investments, loans to CEOs, directors

The RBI said the equity investments done without prior approval would need to be less than 10 per cent of the paid-up capital of the company, or less than one-fifth of the capital if including subsidiaries or joint ventures.

By: ENS Economic Bureau | Mumbai | Updated: September 17, 2015 9:40 am

Relaxing the investment norms of banks, the Reserve Bank of India on Wednesday said lenders will not need prior central bank approval to make equity investments if they have a capital risk-weighted asset ratio of 10 per cent or more and have made a profit in the last financial year.

In another move, the RBI said loans/advances granted to the chief executive officer and whole-time directors of banks will not be considered as ‘loans and advances’ in some specific cases. The relaxation is for loans for purchasing of car, personal computer, furniture, constructing/acquiring a house for personal use, festival advance and credit limit under credit card facility.

The RBI said the equity investments done without prior approval would need to be less than 10 per cent of the paid-up capital of the company, or less than one-fifth of the capital if including subsidiaries or joint ventures.

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“To give more operational freedom and flexibility in decision making, it is advised that banks which have CRAR of 10 per cent or more and have also made net profit as of March 31 of the previous year need not approach the RBI for prior approval for equity investments (in financial services companies),” it said in a circular.

While making such investments banks will have to adhere to other conditions, which include limit on holding in investee company. Earlier banks were required to get a prior approval of the RBI for such investments which are subject to prudential limits.

Under Section 20 of Banking Regulation Act, banks cannot grant any loan or advance to any of its directors. It said the loans and advances should form part of the compensation, remuneration policy approved by the board of directors or any committee of the board to which powers have been delegated or the appointments committee. “The guidelines on base rate will not be applicable on the interest charged on such loans. However, the interest rate charged on such loans cannot be lower than the rate charged on loans to the bank’s own employees,” it said.

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