New Delhi: As part of its efforts to speed up sanctions of loan proposals, the finance ministry has asked state-owned banks to set up regional committees to approve loans to corporate entities, including small and medium enterprises.
It has also proposed the formation of committees for each business segment of banks, such as infrastructure, to ensure faster clearances.
The finance ministry is of the opinion that though individual bank officials have the powers to clear loan proposals, they are often wary of using it. Setting up committees will also ensure lesser discretionary powers in the hands of one official.
This follows the government’s decision to direct banks to set up credit approval committees at the headquarter-level for clearing large loans up to Rs400 crore.
“We have asked public sector banks to set up committees at regional level and across various verticals on credit decisions. We have noticed that though a bank official may have the power to clear a large loan to a corporate entity, he is hesitant to use those powers. This leads to unnecessary delays,” said a finance ministry official, who did not want to be identified. “It is an international best practice and most of the private sector banks in India also follow it.”
The finance ministry, however, has decided to keep all small retail loans such as home and auto loans outside the ambit of the coverage as these asset-backed borrowings are small and do not face large delays.
Banks welcomed the ministry’s directive.
“Forming committees at the regional level will reduce the time taken to clear a loan proposal,” said S.L. Bansal, chairman and managing director of Oriental Bank of Commerce.
“Banks have different verticals such as infrastructure, international business and those catering to requirement of small and medium enterprises. It will help banks as instead of one individual taking credit decisions, it will be collective wisdom at play,” said an executive director with another public sector bank, who declined to be named.
In December, the government asked banks to set up credit appraisal committees comprising their chairman and managing director, executive directors and three chief general managers for approval of large corporate loans up to Rs400 crore.
Before that, banks had to take large credit proposals to the management committee of the board, which included a Reserve Bank of India nominee and independent directors.
While credit approval committees of large banks with businesses of more than Rs3 trillion could clear loan proposals up to Rs400 crore, the limit was Rs250 crore for small banks.
The ministry’s move, aimed at reducing the influence of non-bankers in important credit decisions, had drawn criticism from chartered accountants, who had questioned the prudence of the decision.
For regional committees, however, given the variation in the sizes and networks of banks, the government has left it to each bank to decide on the composition and the geographical distribution.
“We have informed the banks that they can decide on the structure of the committee depending on their requirements and presence in a particular state,” the finance ministry official said. “Since the requirement will vary, we have decided to be flexible on this.”