Section 20 of the Banking Regulation Act 1949 lay down restrictions on loans and advances has been wholly amended from 1 February 1969.  It is applicable to the State Bank of India and other 20 Nationalised banks.  Old section only a secured loan or advance could be made to a director of Banking Company or to the firm or private companies, in which the director was interested as partner, director or managing agent.

        Section 20 of the Banking Regulation Act 1949 amended by the amending Act 58 of 1968 is much wider in scope.  It is the pivot of the so-called social control over the Bank.  It prohibit a banking company from entering into any commitment from granting any loan secured or unsecured, to any of directors or to any firm or company or its subsidiary or holding company in which a director is interested or even to any  individual for whom a directors  stand as a guarantor or with whom a director is a CO-partner in a firm.

Restrictions on loans and advances (Section 20) - 

         (1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956 (1 of 1956), no banking company shall —

            (a) grant any loans or advances on the security of its own shares, or
            (b) enter into any commitment for granting any loan or advance to or on behalf of —

                               (i) Any of its directors,

                              (ii) Any firm in which any of its directors is interested as partner, manager, employee or guarantor, or

                             (iii) Any company not being a subsidiary of the banking company or a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or a Government company of which or the subsidiary or the holding company of which any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or

                              (iv) any individual in respect of whom any of its directors is a partner or guarantor.

             (2) Where any loan or advance granted by a banking company is such that a commitment for granting it could not have been made if clause (b) of sub-section (1) had been in force on the date on which the loan or advance was made, or is granted by a banking company after the commencement of Section 5 of the Banking Laws (Amendment) Act, 1968 (58 of 1968), but in pursuance of a commitment entered into before such commencement, steps shall be taken to recover the amounts due to the banking company on account of the loan, or advance together with interest, if any, due thereon within the period stipulated at the time of the grant of the loan or advance, or where no such period has been stipulated, before the expiry of one year from the commencement of the said Section 5:

Provided that the Reserve Bank may, in any case, on an application in writing made to it by the banking company in this behalf, extend the period for the recovery of the loan or advance until such date, not being a date beyond the period of three years from the commencement of the said Section 5, and subject to such terms and conditions, as the Reserve Bank may deem fit: Provided further that this sub-section shall not apply if and when the director concerned vacates the office of the director of the banking company, whether by death, retirement, resignation or otherwise.

            (3) No loan or advance, referred to in sub-section (2), or any part thereof shall be remitted without the previous approval of the Reserve Bank, and any remission without such approval shall be void and of no effect.

           (4) Where any loan or advance referred to in sub-section (2), payable by any person, has not been repaid to the banking company within the period specified in that subsection, then, such person shall, if he is a director of such banking company on the date of the expiry of the said period, be deemed to have vacated his office as such on the said date.

    Explanation. — In this section —

                (a) “loans or advance” shall not include any transaction which the Reserve Bank may, having regard to the nature of the transaction, the period within which, and the manner and circumstances in which, any amount due on account of the transaction is likely to be realized, the interest of the depositors and other relevant considerations, specify by general or special order as not being a loan or advance for the purpose of this section;

                (b) “director” includes a member of any board or committee in India constituted by a banking company for the purpose of managing, or for the purpose of advising it in regard to the management of, all or any of its affairs.

               (5) If any question arises whether any transaction is a loan or advance for the purposes of this section, it shall be referred to the Reserve Bank, whose decision thereon shall be final.

See also...

Prohibition Of Certain Activities In Relation To Banking Companies (Section 36AD)

Forms of Business of Banking Companies | Banking Law

Audit (Section 30) under the Banking Regulation Act 1949

Jurisdiction of Civil Court and Criminal Court


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