Section 20 of Banking Regulation Act, 1949 prohibits banks from giving any loans or advances to its directors.
However, by a notification dated 16 September 2015, the Reserve Bank of India ("RBI") has specified that the following loans will be permitted: (i) Loan for purchasing car; (ii) Loan for purchasing personal computer; (iii) Loan for purchasing furniture; (iv) Loan for constructing/acquiring a house for personal use; (v) Festival advance, and (vi) Credit limit under credit card facility.
The RBI has also decided to allow commercial banks to grant the above loans to their Chief Executive Officers and Whole Time Directors without obtaining prior approval from the RBI, subject to satisfaction of the following conditions: (a) the loans should form part of the compensation policy approved by the Board of Directors of the company and (b) the interest rate charged on such loans cannot be lower than the rate charged on loans to the respective bank's own employees.
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