Banking and Insurance - Laws and Practice · Control over Organization of Banks

Prohibited Businesses and Restrictions on Banking Operations

Updated 11 October 2026 · Fact-checked

A banking company may do only the businesses listed in section 6(1) of the Banking Regulation Act, 1949. Section 8 bars trading in goods. Section 20 bars loans against its own shares and loans or commitments to its directors and their linked firms and companies. Section 10 limits who may manage or be employed.

Understand Prohibited Businesses and Restrictions on Banking Operations

The Banking Regulation Act, 1949 treats a bank as a custodian of public deposits. So it limits what a bank can do. Think of it as a positive list, a negative list and a conflict-of-interest list.

Positive list (section 6). Besides banking, a bank may do the forms of business in section 6(1)(a) to (o). These include lending, dealing in bills, issuing letters of credit, dealing in foreign exchange, underwriting, safe custody and safe deposit vaults, agency business, guarantees, executing trusts, and acting as executor or trustee. Clause (n) allows things incidental or conducive to its business. Clause (o) lets the Central Government notify further businesses. Section 6(2) closes the door: no bank may engage in any business other than those listed.

Negative list (section 8). A bank cannot directly or indirectly deal in buying, selling or bartering goods, or engage in any trade. There are exceptions: goods connected with realising security it holds, bills of exchange received for collection or negotiation, and business under section 6(1)(i), which is administering estates. "Goods" means moveable property other than actionable claims, stocks, shares, money, bullion, specie and the instruments in section 6(1)(a). So dealing in bullion or shares is not trading under this section. The section does not apply to businesses notified under section 6(1)(o).

Conflict-of-interest list (section 20). A bank cannot lend on the security of its own shares. It cannot enter into any commitment to lend to its directors, to firms in which a director is interested as partner, manager, employee or guarantor, to certain companies linked to a director, or to an individual for whom a director is partner or guarantor. "Director" includes members of boards or committees in India set up to manage or advise on management. Subsidiaries of the bank, section 25 companies of the 1956 Act and Government companies are carved out of the company limb.

Section 10 adds people rules. A bank cannot employ or be managed by a managing agent. It cannot employ a person who has been adjudicated insolvent or convicted of an offence involving moral turpitude, or whose pay is a commission or profit share, or whose pay RBI thinks excessive. A bank also cannot be managed by a person who is a director of another company, who is engaged in any other business or vocation, or whose term of office as the person managing the company exceeds five years at one time. The bar on being a director of another company does not cover a subsidiary of the bank or a section 25 company, and it does not apply for a temporary period of up to three months, or a further period of up to nine months if RBI allows. This management clause does not apply to a director, other than the managing director, merely because he is a director.

Key rules to remember

Section 6(2): closed list: Business allowed = business of banking + section 6(1)(a) to (o). Anything else is prohibited.; Clause (n) covers incidental business. Clause (o) covers businesses notified by the Central Government.
Section 8: no trading: No dealing in goods or trade, except (i) realising security, (ii) bills for collection or negotiation, (iii) section 6(1)(i) business.; Goods exclude actionable claims, stocks, shares, money, bullion, specie and section 6(1)(a) instruments. The section does not apply to businesses notified under section 6(1)(o).
Section 20(1)(a): No loan or advance on the security of the bank's own shares.; Applies notwithstanding section 77 of the Companies Act, 1956.
Section 20(1)(b): No commitment to lend to: a director; a firm where a director is partner, manager, employee or guarantor; a linked company; an individual whose partner or guarantor is a director.; Linked company: one where a director is director, managing agent, manager, employee or guarantor, or holds substantial interest. Exceptions: subsidiary of the bank, section 25 company, Government company.
Section 20(2) to (4): old loans: Recover within the period stipulated at the time of the grant; where none was stipulated, within one year from commencement of section 5 of the Banking Laws (Amendment) Act, 1968. RBI may extend to a date not beyond three years from that commencement. Remission needs RBI's prior approval. If unpaid, the borrower-director is deemed to have vacated office.; Applies to loans that could not have been committed under clause (b), and to loans granted after that commencement under an earlier commitment. Where a period was stipulated, that period applies. The one-year period and the three-year outer limit for RBI extension run from commencement of section 5 of the Banking Laws (Amendment) Act, 1968. Sub-section (2) does not apply once the director vacates office.
Section 20(5): Whether a transaction is a loan or advance is decided by RBI, and its decision is final.; RBI may also exclude transactions from the term by general or special order.
Section 10(1)(c)(iii): term of managing person: Term at one time ≤ 5 years.; Renewals are in blocks of up to five years, sanctioned no earlier than two years before they take effect.

How to solve Prohibited Businesses and Restrictions on Banking Operations questions

Most questions give a bank activity or a loan and ask whether it is permitted. Use a fixed provision, facts, conclusion pattern.

1Identify the nature of the act: a business activity, trading, a loan, or a staffing or management matter.
2For a business activity, test it against section 6(1)(a) to (o). Name the clause. If none fits, section 6(2) prohibits it.
3For anything resembling trade, apply section 8. Check if the item is goods under the Explanation, then look for the three exceptions.
4For a loan, identify the borrower. Is it the bank's own shares as security, a director, a firm, a company or an individual linked to a director? Check the section 20 carve-outs.
5Check timing. Is it a fresh commitment, barred under section 20(1)(b), or an old loan governed by section 20(2) to (4)?
6For employment or management facts, apply section 10 tests: insolvency, moral turpitude, commission pay, excessive pay, other business, five-year term.
7Write the conclusion in one line. Add the practical consequence, such as recovery, RBI approval or the director's deemed vacation of office.

Quickest way: Three-question screen

When to use it: Use for short-note or MCQ-style parts inside a case question when time is tight.

Is it banking or listed in section 6(1)? If yes, allowed. If not, section 6(2) bars it.
Is it buying or selling goods, or trade? If yes, section 8 bars it unless an exception applies.
Is the borrower or security connected to the bank's own shares or directors? If yes, section 20 bars the commitment unless a carve-out applies.

Common mistakes in Prohibited Businesses and Restrictions on Banking Operations

Saying a bank can never deal in goods, even to recover dues.
Students remember the heading "prohibition of trading" and skip the exceptions.
Fix: Always list the exceptions: realising security, bills for collection or negotiation, and section 6(1)(i) business.
Treating bullion or shares as "goods" under section 8.
Everyday meaning of goods is wider than the statutory one.
Fix: Quote the Explanation: goods exclude actionable claims, stocks, shares, money, bullion, specie and section 6(1)(a) instruments.
Saying section 20 bars all loans to companies where a director is involved.
The carve-outs are missed.
Fix: Mention that a subsidiary of the bank, a section 25 company or a Government company is outside clause (b)(iii).
Saying section 20 only prohibits actual loans, not commitments.
Students read it as a ban on lending alone.
Fix: Section 20(1)(b) bars entering into any commitment to grant a loan or advance, so the bar bites before money moves.
Assuming a director can be removed only by the board once a loan is overdue.
Confusion with removal under company law.
Fix: Under section 20(4), a director whose old loan is unpaid on expiry of the period is deemed to have vacated office on that date.
Writing that the section 6 list can be freely extended by the bank.
Clause (n) on incidental business is read too widely.
Fix: Clause (n) covers only things incidental or conducive to the bank's business. New forms need notification by the Central Government under clause (o).

Worked examples

Example 1

Surya Bank Ltd. has a surplus warehouse stock of 500 bags of rice received when a borrower defaulted on a loan secured by the stock. The manager proposes to sell the rice in the market and also to start buying rice in bulk to resell at profit. Advise on the legality under the Banking Regulation Act, 1949.

Show the solution

Provision: section 8 bars a bank from dealing in buying, selling or bartering goods, or engaging in trade, except in connection with realising security given to or held by it.
Rice is moveable property that is not an actionable claim, stock, share, money, bullion or specie. It is goods under the Explanation.
Selling the defaulted borrower's rice falls within the exception: it is in connection with realising security held by the bank.
Buying rice in bulk to resell is trade in goods. None of the three exceptions applies, and it is not a business notified under section 6(1)(o).
Section 6(2) also bars any business outside section 6(1), so the trading has no basis elsewhere in the Act.

Answer: Selling the seized rice to recover the loan is permitted under the exception in section 8. Buying rice for resale is prohibited trading under section 8 and must not be started.

Example 2

Kaveri Bank Ltd. is asked by Mr. Arun, one of its directors, for a commitment to lend ₹50,00,000 to Arun & Sons, a firm in which he is a partner. Separately, Kaveri Bank considers a ₹20,00,000 loan against pledge of its own shares. Advise.

Show the solution

Provision: section 20(1)(b)(ii) bars a commitment to lend to a firm in which any director is interested as partner, manager, employee or guarantor.
Arun is a partner in Arun & Sons, so the firm falls within the bar. The amount does not matter.
The loan against its own shares is barred by section 20(1)(a), which applies notwithstanding section 77 of the Companies Act, 1956.
If a similar old loan were outstanding, section 20(2) would require recovery within the period stipulated at the time of the grant, or where none was stipulated, within one year from commencement of section 5 of the Banking Laws (Amendment) Act, 1968. RBI could extend the period to a date not beyond three years from that commencement. Remission needs RBI's prior approval under section 20(3).
If the director failed to repay within the period, section 20(4) would treat him as having vacated office on the expiry date. If it is doubtful whether a transaction is a loan or advance, RBI decides under section 20(5).

Answer: Both proposals are prohibited. The ₹50,00,000 commitment to Arun & Sons breaches section 20(1)(b)(ii), and the ₹20,00,000 loan on its own shares breaches section 20(1)(a).

Exam tips

Cite the exact clause: for example section 6(1)(n) for incidental business, section 20(1)(b)(iii) for linked companies. Examiners reward precise provisions.
In case questions, name the borrower's link to the director first, then check the carve-outs before concluding.
Write the three exceptions to section 8 in a list. They are a favourite short-note point.
For section 20 questions, add the consequence: recovery period, RBI extension, no remission without approval, deemed vacation of office.
Section 10 facts such as a five-year term or commission-based pay can sit inside a case on management. Check them alongside section 20.

Practice questions from Control over Organization of Banks

Prohibited Businesses and Restrictions on Banking Operations: frequently asked questions

Can a bank do business that is not in section 6?

No. Section 6(2) says no banking company shall engage in any form of business other than those in section 6(1). The Central Government can add forms by notification under clause (o).

Does section 8 stop a bank from dealing in bullion or foreign exchange?

No. Section 8 concerns goods, and the Explanation excludes money, bullion, specie, stocks, shares and the section 6(1)(a) instruments. Dealing in bullion and foreign exchange is also listed in section 6(1)(a).

Can a bank lend to a company where its director is a director?

Generally no. Section 20(1)(b)(iii) bars a commitment to lend to such a company. Exceptions are a subsidiary of the bank, a section 25 company of the 1956 Act, or a Government company.

Who decides whether a transaction is a loan or advance under section 20?

The Reserve Bank of India. Under section 20(5), if a question arises, it is referred to RBI and its decision is final. RBI can also exclude certain transactions from the term by order.