What changed
RBI clarified in 2012 that Section 20 restrictions on loans to directors also apply to their spouse and minor/dependent children, following an instance of circumvention. Earlier circulars did not explicitly cover these relatives. Banks can still lend to a director's spouse if the spouse has independent income and the loan is on standard commercial terms.
What it means for you
Banks must now treat loans to directors' spouses and minor/dependent children as restricted under Section 20, preventing concessional rates or circumvention. For loans above ₹25 lakh, board or management committee approval is mandatory. This tightens governance and reduces conflict-of-interest risks.
What you must do
- Update internal policies to include spouse and minor/dependent children of directors under Section 20 restrictions.
- Ensure all loans to directors' spouses are on commercial terms and based on independent income assessment.
- Route all credit proposals of ₹25 lakh and above to the Board or Management Committee for approval.
- Apply the same norms to award of contracts to directors' relatives.
Who it affects
All scheduled commercial banks (excluding RRBs), Board of Directors and Management Committees, Credit sanctioning authorities, Directors and their relatives
Can a bank give a loan to a director's spouse if the spouse has no independent income?
No, unless the spouse has independent income from employment or profession, and the loan is on standard commercial terms. Otherwise, it falls under Section 20 restrictions.
What is the approval requirement for loans above ₹25 lakh to directors' relatives?
Such proposals must be sanctioned by the bank's Board of Directors or the Management Committee of the Board.
Do these rules apply to contracts as well?
Yes, the same norms for loans and advances apply to award of contracts to directors and their relatives.