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

Mehta & Sons, a partnership, has a loan outstanding with Orbit Bank Ltd. Ms Nair, a director of Orbit Bank, is not a partner in Mehta & Sons but has given a guarantee for a separate loan of Mr Shah, an individual borrower. Orbit Bank wants to remit part of Mr Shah's debt. Which statement is correct?

Prior Reserve Bank approval is needed. Section 20A(1)(c) covers debts due from an individual whose partner or guarantor is a director of the bank. Since Ms Nair guarantees Mr Shah's loan, even a partial remission requires approval, regardless of amount or abstention.

  1. APrior Reserve Bank approval is needed, because a director is the individual's guarantorCorrect
  2. BNo approval is needed, because only partnership debts are covered
  3. CApproval is needed only if the remitted amount exceeds half of the debt
  4. DApproval of the board alone suffices if Ms Nair abstains from voting

Explanation

Section 20A(1)(c) covers any individual if any of the bank's directors is his partner or guarantor. Ms Nair is Mr Shah's guarantor, so prior Reserve Bank approval is needed for remission in whole or in part. The Act sets no half-of-debt threshold, and a director's abstention does not replace Reserve Bank approval.

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