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The Reserve Bank of India (RBI) has raised the limit of loan that can be given by banks to a Director on the board of a bank to Rs 5 crore from the previous cap of Rs 25 lakh.

In a circular issued on Friday, the central bank said that unless sanctioned by the Board of Directors or the Management Committee, banks should not grant loans and advances aggregating Rs 5 crore and above to any relative other than spouse and minor or dependent children of their own Chairmen and Managing Directors or other Directors. Same would be the rule in terms of relatives of Chairman or Managing Director or other directors of other banks.

Further, any credit facility given to the Directors and relatives of Directors have to be sanctioned by appropriate authority in the financing bank, and the matter has to be reported to the board, it said.

Board approval would be required for loans given to major shareholders of the bank, or his relatives, where the shareholder holds more than 10 per cent in the bank.

There have been instances in the past wherein existing Directors allegedly misused their position to grant loans to favour their family members, as in the case of the former ICICI bank MD & CEO Chanda Kochhar who is alleged to have misused her official post to grant a massive Rs 3,250 crore loan to Videocon.

Allegedly, the loan was part of a quid pro quo arrangement under which Venugopal Dhoot invested Rs 64 crore in Chanda Kochhar's husband's NuPower Renewables.