The Reserve Bank of India (RBI) has upped the cap on personal loan amount that can be granted to board directors and their families to Rs 5 crore from Rs 25 lakh earlier. This would now not require the prior approval of the board and management committee.

On 23 July, the RBI also said in a circular that banks are not allowed to grant loans more than Rs 5 crore to any relative other than spouse and dependent children of chairman and managing directors or other directors of their own bank and other banks. The same applies in the case of any firm in which any of relatives other than spouse and dependent children is a partner, major shareholder or director.

The central bank felt that the threshold of Rs 25 lakh, fixed way back in 1996, needed an upward revision to reflect the increase in general prices since that time, encourage professionals with expertise to join the boards and reduce the cases requiring approval at the board/ management committee level without diluting the regulatory intent, the RBI said. It thus decided to raise the threshold to Rs 5 crore.

However, the upper threshold will be applicable for grant of only ‘personal loans’ to any director of other banks. The existing threshold of Rs 25 lakh will continue to apply for business loans to directors of other banks, the RBI said.

Currently, sanction by the board/ management committee for grant of loans to a company is required, where the relative of a director holds substantial interest which is defined as 10% of paid-up capital or Rs 5 lakh, whichever is less.

"This places a disproportionate burden on the board/ management committee. This stipulation has been relaxed by mandating that sanction of board/ management committee would be required only when the relative is a major shareholder in a company (which is defined as holding of 10 per cent or more of paid-up share capital or five crore rupees in paid up shares, whichever is less)," the RBI said.