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      Question

      Under Section 20 of the Banking Regulation Act, 1949, a

      banking company is strictly prohibited from granting any loan or advance on the security of:
      A Government Securities or Life Insurance Policies. Correct Answer Incorrect Answer
      B Its own shares. Correct Answer Incorrect Answer
      C Immovable property located outside India. Correct Answer Incorrect Answer
      D Fixed Deposits held with other scheduled commercial banks. Correct Answer Incorrect Answer

      Solution

      The Prohibition (Section 20(1)(a)): A banking company is explicitly forbidden from granting any loans or advances on the security of its own shares. The logic is simple: if a borrower defaults, the bank would be left holding its own shares as collateral. This would essentially mean the bank’s capital is being used to cover a loss, leading to "capital erosion" and potentially a collapse in its share price.

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