Loans gone bad - can staff be investigated?

The Finance Ministry and RBI are trying to ensure an environment of confidence for bankers, to raise credit creation.

Loans gone bad - can staff be investigated?

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• The story: Public sector banks in India have suffered from a sharp rise in their non-performing assets (NPAs) since 2011-12. While a lot of these loans may have been issued with good intentions, with time, the bankers come under a net of suspicion.
• Investigating the bankers: India's Finance Ministry issued new norms to guide state-owned banks in adopting a uniform staff accountability framework for non-performing assets (NPAs) up to Rs 50 crore. The goal was to “protect employees for their bona fide actions and at the same time make them accountable for any wrongdoing or any inaction on their part”. The guidelines will be implemented with effect from April 1, 2022, for accounts that turn NPAs beginning the next financial year.
• Details of new framework: The ‘Staff Accountability Framework for NPA Accounts up to Rs 50 crore (Other than Fraud Cases)’, issued on October 29 by the Department of Financial Services (DFS), advises public-sector banks to revise their staff accountability policies and frame procedures with approval of their respective boards.

1. Banks will have to complete an accountability exercise within six months from the date an account is classified as NPA. Depending on the banks’ business size, the guidelines suggest threshold limits for scrutiny of the accountability by the chief vigilance officer.
2. If the NPA is caused by external factors — such as change in government policy, natural calamities, non-release of government subsidy/grant — it should not attract a staff accountability examination, the guidelines say.

• Why do all this: The step has been taken to protect bankers and remove their fears of being investigated for bona fide business decisions gone wrong. Bankers have provided feedback to the government that sometimes decisions on credit sanctions are slow as bankers fear investigative agencies may come after them if the accounts turn NPA. This not only adversely affects staff morale but also puts a strain on the bank’s resources. While punitive action needs to be taken against the officers having mala fide intent/involvement, it is essential to ensure that bona fide mistakes are dealt with compassion.
• Fears: After the Rs-13,000-crore loan fraud on Punjab National Bank by diamond trader Nirav Modi came to light in 2018, senior officials of the bank were hauled up and those involved faced tough action. An environment got created where PSU banks became extremely cautious and risk-averse even in the case of bona fide corporate loans. This was seen as stalling credit deployment, which is crucial to support economic growth.

1. In December 2019, Finance Minister Nirmala Sitharaman assured the heads of state-run banks of protection from undue harassment from probes into their lending decisions.
2. The government felt that fear of 3Cs – CBI (Central Bureau of Investigation), CVC (Central Vigilance Commission) and CAG (Comptroller and Auditor General) - was holding back banking decisions.

• New rules: They will apply slab-wise.

1. Up to Rs.10 lakh - Staff accountability need not be examined in NPA accounts with outstanding up to Rs 10 lakh. The government has argued that most loans up to Rs 10 lakh are “template-based” and do not constitute a major percentage of the NPA portfolio by amount. Such accounts can turn into NPA even due to a slight change in circumstances including a family health crisis or a shutdown, leading to disruption in cash flows.
2. Rs 10 lakh - Rs. 1 crore: For examining staff accountability, banks may decide on a threshold of Rs 10 lakh or Rs 20 lakh, depending on their business size. For loans between Rs 10 lakh and Rs 1 crore, which mainly include home and car loans, SME and agriculture credit, staff accountability is to be examined by a committee formed at regional/controlling offices. For preliminary examination, the controller will submit to the committee a brief report, covering details of the loan and observations in inspection/audit reports for the previous four years. If the committee finds a case of staff accountability exists, this will be examined by a fact-finding officer.
3. Rs 1 crore to Rs.50 crore - Accounts in this range are mostly credit facilities sanctioned to business units warranting examination by a specialised unit within the banks. NPA accounts in this range should undergo a preliminary examination by a committee constituted at one level higher than the sanction level — an account sanctioned at the regional office will be taken up at the zonal level, those at the zonal level by circle office or head office, and so on.
4. Above Rs.50 crore - For NPA accounts in this range, staff accountability is to be examined as per the existing guidelines. The RBI has set a framework under which banks must initiate and complete a staff accountability exercise within six months from the date of classification as a fraud. RBI says banks should bifurcate all fraud cases into vigilance and non-vigilance categories. Only vigilance cases should be referred to investigative authorities. Non-vigilance cases may be investigated and dealt with at the bank level within a period of six months.

• What happens today: Different banks follow different procedures for staff accountability exercises. Banks carry out such exercises in respect of all accounts that turn NPA. This has made many bankers reluctant about taking exposure in new units or projects. As a result, credit offtake to small units that require bank funding were starved of liquidity, especially after the pandemic began.
• Credit growth: The new norms may help bankers take credit decisions faster and help support the economy. Slow credit delivery to industries due to the fear of implication needs urgent address. A growing economy depends heavily on bank credit.
• EXAM QUESTIONS: (1) Explain the genesis of the NPA crisis in India. (2) What are the new norms that may alleviate the fear of bankers regarding risks emanating from loans turning bad in the future? Explain.

Read more on - Polity | Economy | Schemes | S&T | Environment

#NPAs #CCC #RBI #financeministry

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.