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

Sagar Mercantile Bank Ltd, a banking company, wants to write off in full a loan of Rs 40 lakh due from Mr Rao, one of its directors. The board has approved the remission, but the Reserve Bank has not been approached. What is the legal position?

The remission is void unless the Reserve Bank gave prior approval. Section 20A restricts a bank's power to remit debts due from its directors, and any remission made in breach is void and of no effect. Board approval or later shareholder ratification cannot validate it.

  1. AThe remission is valid because the board approved it
  2. BThe remission is valid if the shareholders ratify it later
  3. CThe remission is void unless made with the prior approval of the Reserve BankCorrect
  4. DThe remission is valid but the director must disclose it in the annual report

Explanation

Section 20A bars a banking company from remitting any debt due from its directors, in whole or in part, without the prior approval of the Reserve Bank. This applies despite the Companies Act provision on company powers. A remission made in contravention is void and of no effect, so board approval or later ratification does not cure it.

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