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Explained: When can PSU bank staff be probed for NPAs?

Govt lays down new norms for when bank staff may be investigated if a loan goes bad. How does this address staff’s fears, and how can it help the economy?

Written by Sunny Verma , George Mathew | Mumbai, New Delhi |
Updated: November 3, 2021 12:43:58 pm
Banks will have to complete an accountability exercise within six months from the date an account is classified as NPA. (File)

The Finance Ministry has issued a fresh set of norms to guide state-owned banks in adopting a uniform staff accountability framework for non-performing assets (NPAs) up to Rs 50 crore. The aim is 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.

What is the 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.

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. If 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 was the need felt?

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 approach not only adversely affects staff morale but also puts a huge 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,” says the Indian Banks’ Association (IBA).

What has led to such 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 had to face tough action. This, and a series of other unrelated frauds, led to an environment in which 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.

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. She said after a review meeting with top bankers from state-run banks that “fear of 3Cs – CBI (Central Bureau of Investigation), CVC (Central Vigilance Commission) and CAG (Comptroller and Auditor General)” was holding back banking decisions.

What are the rules laid down?

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.

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.

Rs 1 CRORE–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.

The committee should be headed by an official senior to the sanctioning authority. For preliminary examination by the committee, a detailed report should be submitted through the controller. If the committee finds material lapses in any of the processes, the account may be referred at the discretion of the committee to the controlling audit office for a detailed examination of staff accountability.

What is the existing framework?

Currently, different banks are following 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.

What about accounts above Rs 50 crore?

According to the Finance Ministry notification, for NPA accounts in this range, staff accountability is to be examined as per the existing guidelines. However, 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. Details of the exercise and the action taken may be placed before the SCBF (Special Committee of the Board for monitoring and follow-up of Frauds) and intimated to the RBI at quarterly intervals.

The 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. In cases involving very senior executives, the board or the audit committee may initiate the process of fixing accountability, which should not be held up on account of the case being filed with law-enforcement agencies.

How will the new norms improve credit growth?

Banking industry executives say the new norms will 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, the IBA said.

Non-food credit offtake increased by 6.8 per cent to Rs 108.94 lakh crore during the 12-month period ended September 2021, after 5.1 per cent in the previous year, with the country lifting Covid-induced restrictions and the economy on the comeback trail. Credit growth to industry picked up to 2.5 per cent in September 2021 from 0.4 per cent in September 2020.

“A growing economy depends heavily on bank credit. The Government and the RBI also have on various occasions expressed their concern on slow credit off-take and have stressed on eradication of fear in taking business decisions. Fair, predictable and transparent systems and procedures of conducting staff accountability are necessary to eliminate subjectivity,” the Finance Ministry said.

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