RBI Guidelines for Loan

The guidelines issued by RBI for loans and advances are conferred by the Banking Regulation Act, 1949. It is the master circular that consolidates the instruction issued by the central bank of the nation to the banks on statutory and other restrictions on loans and advances to different sectors of the economy. The rbi guidelines for loan are applicable to all scheduled commercial banks, excluding regional rural banks. The banks must implement the instructions given by RBI to ensure that banking activities being undertaken by them are run on sound, prudent, and profitable lines. 

Guidelines of RBI for Granting Loans and Advances

• Granting loans to director’s relatives

According to the rbi guidelines for loan, no loans and advances will be granted to the relatives of the bank’s Chairman, Managing Director, or other Directors and their relatives without the approval or knowledge of the board. 

• Restriction on advances against industries producing or consuming ODS (Ozone Depleting Substances)

Banks are prohibited from providing any kind of financial assistance to the industries producing or consuming Ozone Depleting Substances (ODS). The small or medium units engaged in the production of aerosol can’t be financed by the banks.

• Restriction on loans against essential commodities under SCC (Selective Credit Control)

With the motive to prevent the speculative holding of the essential commodities like food grains, major oilseeds, raw cotton, sugar, and more with the help of bank credit, RBI according to Section 21 and 35A of the Banking Regulation Act, 1949, issues directives to all commercial banks time and again, stipulating restrictions on the loans or advances by the banks against specified sensitive commodities. 

• Advances against shares, debentures, and bonds

According to rbi guidelines for loan, the following mentioned are some conditions under which loans and advances can be granted against shares, debentures, and bonds to individuals:

Purpose of the loan: Loans and advances can be granted against shares, debentures, and bonds to individuals only to meet contingencies, personal requirements, or for subscribing to new shares, debentures, or bonds.

Amount of loan: in case securities are held in physical form then the amount for the loan should not exceed the limit of Rs 10 lakhs and if the securities are held in the dematerialized form, then the amount for a loan should not exceed the limit of Rs 20 lakhs.

Margin: Banks are required to maintain a margin of 50% of the market value of securities held in physical form and a margin of 25% if the same securities are held in dematerialized form. 

• Loans and advances for acquisition and construction of the building

Housing loans are defined under the rbi guidelines for personal loan. Following mentioned guidelines are taken into account by the banks while formulating their policies and ensure that the credit given is being used only for production and construction activities. 

A) Acquisition of land:

Credit can be granted by the bank for the purchase of the plot only if it is declared by the borrower that he intends to construct a house on the same plot.

B) Construction of building or ready-built-house:

1. Banks may grant loans for purchasing or construction of dwelling for each family and loans for repairing the damaged dwelling units.
2. Banks may grant loans to the individual who intends to buy the old house where he is currently living as a tenant. 
3. Banks may grant loans to the individual who already owns a house in the town or village where he is currently living, to buy or construct a second house in the same or another town or village for self-occupation. 

• Financial assistance to Micro and Small Enterprises

The micro and small enterprises having the working capital limits of up to five crores are provided with the working capital finance by the banks based on the computation of 20% of their projected annual turnover.

Income Recognition Policy for Loans with Moratorium on Payment of Interest

As per the latest rbi circular on moratorium, once an account is classified as Non-Performing Asset (NPA), the entire amount of interest that is accrued and credited to the income account in the past periods, must be reversed to an extent that it remains unrealized. It is classified by the central bank of the country that if the moratorium on payment of interest becomes NPA after the completion of the moratorium period, then the capitalized interest corresponds to the interest accrued during the same moratorium is not required to be reversed. 

Conclusion

It is the Banking Regulation Act, 1949, according to which the guidelines for loans and advances are issued by the Reserve Bank of India. The rbi guidelines for loan are applicable to all scheduled commercial banks, but regional rural banks are exempted from such restrictions. All scheduled commercial banks are mandated to comply with the statutory and other restrictions on loans and advances as issued by RBI for better functioning.