Home / Industry / Banking /  Decoding the new model to fix blame for bad loans

The finance ministry has proposed uniform norms for staff accountability in public sector banks (PSBs) depending on the size of the bad loans to assure bankers that only maleficence will be punished, not genuine decisions. Mint takes a look at this proposal.

What is the new policy being proposed?

State-owned banks conduct accountability exercises to assess the reasons behind a loan turning bad and every bank has its own set of internal guidelines. A loan can turn bad for reasons beyond the control of the promoter and could thus be a genuine business failure, but some have also turned bad because of the lack of proper due diligence before sanctioning. Effective 1 April 2022, the government has proposed a four-tier structure, based on the loan value, for loans of up to 50 crore and asked banks to revise their accountability policies.

What was the need for new norms?

The ministry has been engaged in talks with the central vigilance commission on updating existing staff accountability norms. One of the primary reasons was to keep up with the changing dynamics of banking, especially with regard to how loans are sanctioned. Loan sanctions and appraisals of up to 5 crore in mortgages and other retail categories are increasingly being done outside of branches with the help of new technologies. The new norms also acknowledge the amount of resources being used up to assess accountability for smaller loans and thus exempt loans of up to  10 lakh from such exercises, unless they are tagged as fraudulent.

How did lenders react to this policy?

The Indian Banks’ Association (IBA) said that staff accountability exercise is currently carried out for all non-performing assets (NPA) irrespective of size. This approach, it said, not only adversely affects staff morale but also puts a huge strain on the bank’s resources. It believes that the new guidelines will boost the morale of public sector bankers.

What could be the impact?

In private conversations, bankers have for long expressed concerns over punitive actions taken when large loans turn bad. This is what they refer to as the fear of the three Cs, the Central Bureau of Investigation, Comptroller and Auditor General of India, and the Central Vigilance Commission among staff of public sector banks. Such apprehensions have impacted business decisions as employees do not want to be held accountable for loans turning bad even when they follow internal policies to a tee.

What are some of the assessment caveats?

The ministry has said examination of lapses should take into account the circumstances prevailing at the relevant time. Whether the business decision taken was bona fide or had intentional negligence should be carefully looked into. Banks should also fix responsibility after ascertaining which department within the lender is at fault. In an account that turned bad because of improper monitoring, accountability should not be ascribed on officials involved at the sanctioning level.

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