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

Kaveri Traders Pvt Ltd owes Rs 25 lakh to Delta Bank Ltd. Mr Iyer, a director of Delta Bank, is a guarantor of this debt. The bank proposes to remit Rs 10 lakh of it. Under the Banking Regulation Act, 1949, what is required?

Prior approval of the Reserve Bank is required. Section 20A covers debts due from a firm or company in which a director of the bank is interested as guarantor, and it applies to remission in whole or in part. So even a partial remission of Rs 10 lakh needs approval.

  1. ANo approval, because the borrower is a company and not a director
  2. BPrior approval of the Reserve Bank, because a director is interested as guarantorCorrect
  3. CApproval of the Central Government only
  4. DApproval only if the whole debt, not part, is remitted

Explanation

Section 20A(1)(b) covers debts due from a firm or company in which any director is interested as director, partner, managing agent or guarantor. The restriction applies to remission in whole or in part, so Rs 10 lakh needs prior Reserve Bank approval. Option 4 is wrong because partial remission is covered.

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