Screws being tightened on banks for bad loans

Screws being tightened on banks for bad loans
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First Published: Mon, Jul 13 2009. 09 07 PM IST
Updated: Mon, Jul 13 2009. 09 07 PM IST
Mumbai: The ministry of finance has called for better accountability from public sector banks while granting or rejecting loans for new businesses above the borrowers’ credit limit.
In a recent note to all public sector bank chairmen, joint secretary for banking operation and administration Amitabh Verma has suggested that banks should maintain “a comprehensive record of reasons either for accepting or declining” such loan proposals.
Some banks have constituted a committee of senior executives to evaluate requests for fresh loans from their borrowers above a certain cut-off limit.
Verma has not found fault with such a mechanism, but has said all proposals should be dealt with transparently.
The note assumes significance since the finance ministry does not generally intervene in banking operations and the banking regulator, the Reserve Bank of India, is expected to look into such things.
Most public sector banks form “new business” groups for faster credit disbursals to their borrowers. Typically such a group consists of select general managers of a bank.
The new business group generally looks after proposals of Rs20-25 crore and above.
In case the group is unable to take a decision, the proposal goes to the chairman and even the management committee of the board.
According to a banking industry official, who spoke on condition of anonymity, the Central Vigilance Commission has come across certain instances where some banks have found to have given fresh loans to borrowers, who had defaulted on earlier loans, and banks had to enter into one-time settlements (OTS) with them.
Such settlements have been approved by the banking regulator.
The vigilance commission looks into functional irregularities in public sector undertakings and government departments.
The official said the ministry has taken a note of the vigilance commission’s findings and issued the note to public sector banks to plug any loopholes that exists in processing fresh loan proposals from borrowers who had earlier defaulted.
The ministry note said that banks are expected to deal with loan proposals “within policy prescriptions evolved by their respective board of directors”, but “there could, however, be occasions where there would arise a need to allow such deviations from policy prescriptions in the bank’s interest ....”
While there could be minor deviations in case of banks giving fresh loans to borrowers who had availed of OTS, “... such deviations need be clearly outlined in the note allowing such deviations. Such deviations must be clearly justified exceptions in the course of business and must also be reported to the board in its next meeting for information”, the note said.
There are no codified OTS rules and they vary from one bank to the other.
According to bankers, they don’t lend to borrowers with whom they had had to enter OTS, except in case where the government instructs them to do so.
For example, in case of the farm debt waiver, banks were asked to give fresh loans to those farmers with whom they had entered into an OTS pact, under which they waived off 25% of the loan if the borrower had cleared 75%.
“We don’t encourage borrowers with an OTS history,” said the chairman of public sector bank, who did not want to be identified.
“The ministry has told us to maintain better record and report them as quickly as possible,” said another banker who, too, did not want to be named.
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First Published: Mon, Jul 13 2009. 09 07 PM IST