The Reserve Bank of India (RBI) has issued key clarifications on the applicability of Section 20 of the Banking Regulation Act, 1949, in relation to lending by Rural Co-operative Banks (RCBs), providing greater regulatory clarity and operational flexibility to the cooperative banking sector.
The clarifications form part of the Credit Risk Management – Amendment Directions, 2026, and are aimed at resolving long-standing ambiguities surrounding related-party lending and governance norms in cooperative institutions.
Section 20 of the Banking Regulation Act restricts banks from granting loans or advances to their directors or to entities in which directors have a substantial interest, with the objective of preventing conflicts of interest and misuse of depositor funds.
In its latest clarification, the RBI has stated that cooperative entities shall not be treated as a “company” or a “firm” for the purpose of Section 20. This distinction is significant for the cooperative credit structure, which functions through a federated system rather than a corporate ownership model.
As a result of this clarification, there will be no restriction under Section 20(1)(b) on credit facilities extended by State Co-operative Banks to Central Co-operative Banks and Primary Agricultural Credit Societies (PACS), or by Central Co-operative Banks to PACS.
The move is expected to ease credit flows within the short-term cooperative credit structure, which plays a vital role in meeting the agricultural and rural financing needs across states.
The RBI has also relaxed norms relating to loans and advances to directors of RCBs, subject to strict safeguards. Directors may now avail loans against eligible securities such as government securities, life insurance policies, or fixed deposits held in their own name.
Such loans must comply with the prescribed loan-to-value norms, which shall not exceed 100 per cent of the realizable value of the underlying security or any specific LTV ratio mandated by the RBI.
In addition, secured personal loans to directors, including the chairman, managing director, or chief executive officer, have been permitted up to the same limits applicable to employees of the bank. These loans will remain subject to prudential norms and exposure limits, and the interest rate charged must not be lower than the rate applicable to employees.
The RBI has further stipulated that such loans cannot be used for investment in financial assets, ensuring that the relaxation does not lead to speculative or risk-enhancing activities.
The amended directions will come into effect from April 1, 2026, although RCBs have been given the option to implement them earlier. Overall, the RBI’s move seeks to balance improved ease of operations for cooperative banks with robust safeguards for governance, transparency, and financial stability in the rural banking ecosystem.
