RBI loan restrictions for bank directors and relatives upheld as rational measures against conflict of interest and misuse of position.

RBI circulars restricting loans and other financial accommodation to directors of co-operative banks and their relatives were upheld as a valid exercise of statutory power under the Banking Regulation Act, 1949. The classification was found to have a rational nexus with preventing misuse of position, conflict of interest, and circumvention of the prohibition already applicable to directors under section 20, so the Article 14 challenge failed. The Court also accepted that the measure was supported by monetary and credit policy considerations and Joint Parliamentary Committee recommendations, and declined to interfere with the policy decision once it was shown to rest on relevant material and public interest.

---

---

Issues: Whether the Reserve Bank of India had the power and sufficient basis to issue circulars restricting loans and other financial accommodation to directors of co-operative banks and their relatives, and whether the circulars were discriminatory and violative of Article 14.

Analysis: The circulars were issued under the Reserve Bank of India's statutory powers under the Banking Regulation Act, 1949, and were supported by the monetary and credit policy for 2003-2004 as well as the recommendations of the Joint Parliamentary Committee. The restriction was aimed at preventing misuse of position, conflict of interest, and evasion of the prohibition already applicable to directors under section 20 of the Banking Regulation Act, 1949. The classification of relatives of directors was held to have a rational nexus with the object of curbing irregularities in bank lending and strengthening public interest in the banking system. The Court declined to interfere with the policy decision or to probe the internal deliberations of the Reserve Bank once the measure was shown to be founded on relevant material and public interest.

Conclusion: The circulars were upheld as valid and non-discriminatory, and the challenge under Article 14 failed.

---