Learn about general concepts of lending process in a bank. To whom a bank can give Loan? When a bank cannot give loan?

1. GENERAL CONCEPTS
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2. To Whom a Bank can give
Loan?

3. When a bank can not give
Loan?

4. Restrictions for granting Loans by
Banks
 Advances Against banks Own Shares
 Advances to bank’s directors
 Restrictions on holding Shares in Companies
 Granting Loans and Advances to relatives of
Directors
 Advances against FDR issued by other Banks
 Advances to Agents/Intermediaries based on
Consideration of Deposit Mobilisation
 Loans against Certificate of Deposits

5. Advances against bank’s own
shares
 Ruling Section – 20(1)
of Banking Regulation
Act, 1949
 A bank can not grant
any loans and
advances on the
security of its own
shares

6. Advances to bank’s directors
 Ruling Section – 20(1) of Banking Regulation Act,
1949
 Banks are prohibited from entering into any
commitment for granting any loans or advances to or
on behalf of any of its directors, or any firm in which
any of its directors is interested as partner, manager,
employee or guarantor, or any company [not being a
subsidiary of the banking company or a company
registered under Section 8 of the Companies Act,
2013, or a Government company] of which, or the
subsidiary or the holding company of which any of the
directors of the bank is a director, managing agent,
manager, employee or guarantor or in which he holds
substantial interest, or any individual in respect of
whom any of its directors is a partner or guarantor

7. Restrictions on holding Shares in
Companies
 In terms of Section 19(2) of the Banking
Regulation Act, 1949, banks should not hold
shares in any company except as provided in sub-
section (1) whether as pledgee, mortgagee or
absolute owner, of an amount exceeding 30
percent of the paid-up share capital of that
company or 30 percent of its own paid-up share
capital and reserves, whichever is less.
 Further, in terms of Section 19(3) of the Banking
Regulation Act, 1949, the banks should not hold
shares whether as pledgee, mortgagee or
absolute owner, in any company in the
management of which any managing director or
manager of the bank is in any manner concerned
or interested

8. Granting loans and advances to
relatives of Directors
 Without prior approval of the Board or without
the knowledge of the Board, no loans and
advances should be granted to relatives of the
bank's Chairman/Managing Director or other
Directors, Directors (including
Chairman/Managing Director) of other banks
and their relatives, Directors of Scheduled Co-
operative Banks and their relatives, Directors
of Subsidiaries/Trustees of Mutual
Funds/Venture Capital Funds set up by the
financing banks

9. Advances against Fixed Deposit
Receipts 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.
In the light of these happenings, the banks
should desist from sanctioning advances
against FDRs, or other term deposits of
other banks.

10. 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

11. Loans against Certificate of
Deposits
 Banks cannot grant loans against CDs.
Furthermore, they are also not permitted to
buy-back their own CDs before maturity. On a
review it has been decided to relax these
restrictions on lending and buy back, until
further notice, only in respect of CDs held by
mutual funds. While granting such loans to the
mutual funds, banks should keep in view 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, as hitherto

12. What if Payment is Not received?

13. Bouncing of Cheque
 What is Bouncing of Cheque?
 Who is liable to be prosecuted?
 A drawer of Cheque (which is returned unpaid
because of insufficiency of funds or stopping the
payment of cheque) is deemed to have
committed criminal liability under section 138 to
142 of Negotiable Instruments Act, 1881

14. Pre-requisites for Prosecution
 The Cheque should have been issued in discharge of some
liability. [A cheque given in gift will not fall in this frame work]
 The Cheque should have been presented timely i.e. within
the validity period.
 The Payee should give notice to the drawer demanding
payment within 30 days of his receiving information of
dishonour which should be for no other reason than
insufficiency of funds.
 The Drawer can pay within 15 days of receipt of Notice. If he
fails to do so, prosecution could take place. (cause of action
arises).
 The Complaint can be made either by payee or holder.
 The Complaint is to be made within one month of the cause
of action arising.
 No Court inferior to that of Metropolitan Magistrate or Judicial
Magistrate of Ist Class will try the offence.

15. Punishment
 Imprisonment – for a term which may extend
to 2 Years.
OR
 Fine – which may extend to twice the amount
of Cheque
OR
Both of them