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

The Ministry of Finance has published a new set of standards guide public banks in adopting a uniform staff accountability framework for non-productive assets (NPA) up to Rs 50 crore. The aim is to “protect employees for their acts of good faith and at the same time hold them accountable for any wrongdoing or inaction on their part”. The guidelines will be implemented as of April 1, 2022 for accounts that become NPAs as of the next fiscal year.

What is the new framework?

The “Staff Accountability Framework for NPA Accounts Up to Rs 50 Crore (Other Than Fraud Cases)”, published Oct. 29 by the Department of Financial Services (DFS), advises public sector banks to review their staff responsibility policies and to frame their procedures with the approval of their respective boards.

Banks will be required to perform an accountability exercise within six months of the date an account is classified as NPA. Depending on the size of the banks’ business, the guidelines suggest threshold limits for the scrutiny of liability by the head of vigilance. If the NPA is caused by external factors – such as a change in government policy, natural disasters, non-release of a government grant / grant – it should not attract a staff accountability review, the guidelines say. .

Why did the need arise?

The move was taken to protect bankers and eliminate their fears of being investigated for good faith business decisions gone awry. Bankers have told the government that sometimes decisions on credit sanctions are slow, as bankers fear that investigative agencies will prosecute them if accounts become NPA.

“This approach not only affects staff morale, but also puts a strain on the bank’s resources. While punitive action should be taken against agents with bad faith intent / implication, it is essential to ensure that good faith errors are treated with compassion, ”says the Association of Indian Banks (IBA).

What led to such fears?

After the fraud on a 13,000 crore rupee loan to the Punjab National Bank by diamond trader Nirav Modi came to light in 2018, senior bank officials were arrested and those involved faced criminal charges. severe measures. This, and a series of other unrelated frauds, has led to an environment in which PSU banks have become extremely cautious and risk averse, even in the case of bona fide business loans. This was seen as a blockage in the deployment of credit, which is crucial to support economic growth.

In December 2019, Finance Minister Nirmala Sitharaman assured heads of state-owned banks of protection against unwarranted harassment resulting from inquiries into their lending decisions. She said after a review meeting with key public bankers that “fear of 3Cs – CBI (Central Bureau of Investigation), CVC (Central Vigilance Commission) and CAG (Controller and Auditor General)” was delaying banking decisions .

What are the rules?

UP TO RS 10 lakh: Staff liability does not need to be examined in NPA accounts with outstanding amounts of up to Rs 10 lakh. The government has argued that most loans up to Rs 10 lakh are “model based” and do not constitute a significant percentage of the NPA portfolio in terms of amount. Such accounts can turn into a NPA even due to a slight change in circumstances, including a family health crisis or closure resulting in disruption of cash flow.

Rs 10 LAKH – RS 1 CRORE: To examine staff liability, banks may decide on a threshold of Rs 10 lakh or Rs 20 lakh, depending on the size of their business. For loans between Rs 10 lakh and Rs 1 crore, which mainly include home and auto loans, SME loans and agriculture, staff liability should be reviewed by a committee formed in regional / oversight offices. For preliminary consideration, the Controller will submit to the Committee a brief report, covering loan details and observations in the inspection / audit reports for the previous four years. If the committee finds that there is a staff liability case, it will be reviewed by a fact-finding officer.

Rs 1 CRORE – 50 CRORE: The accounts in this range are mostly sanctioned credit facilities to business units warranting review by a specialized unit within banks. NPA accounts in this range must be subject to prior review by a committee set up at a level above the sanction level – a sanctioned account at the regional office will be taken over at the zonal level, those at the zonal level by district office or head office, etc.

The committee should be headed by a senior official from the sanctioning authority. For prior review by the committee, a detailed report must be submitted through the controller. If the committee finds material deficiencies in any of the processes, the account may be referred, at the committee’s discretion, to the oversight audit office for a detailed review of staff accountability.

What is the existing framework?

Currently, different banks follow different procedures for staff accountability exercises. Banks perform such exercises for all accounts that become NPA. This has made many bankers reluctant to take exposure in new units or new projects. As a result, direct debits to small units requiring bank financing have been deprived of liquidity, particularly after the start of the pandemic.

What about accounts above Rs 50 crore?

According to the notification from the Ministry of Finance, for NPA accounts within this range, staff liability should be reviewed in accordance with existing guidelines. However, the RBI has a framework in place where banks must initiate and complete a staff accountability exercise within six months from the date of classification as fraud. The details of the exercise and the follow-up given may be submitted to the SCBF (Special Committee of the Supervisory Board and Fraud Monitoring) and communicated to the RBI on a quarterly basis.

The RBI says banks should divide all fraud cases into vigilance and non-vigilance categories. Only cases of vigilance should be referred to the investigating authorities. Cases of non-vigilance can be investigated and dealt with at the level of the bank within six months. In cases involving senior management, the board of directors or audit committee may initiate the process of determining liability, which should not be delayed due to the file filed with law enforcement agencies.

How will the new standards improve credit growth?

Banking executives say the new standards will help bankers make faster credit decisions and support the economy. The slowness of lending to industries due to fear of involvement requires an urgent response, the IBA said.

The non-food credit drawdown rose 6.8% to Rs 108.94 lakh crore in the 12-month period ended September 2021, after 5.1% the previous year as the country lifted the restrictions induced by Covid and the economy on the way back. Credit growth to industry accelerated to 2.5% in September 2021, from 0.4% in September 2020.

“A growing economy depends heavily on bank credit. The government and the RBI have also repeatedly expressed concern over slow demand for credit and have insisted on eradicating fear from business decision-making. Fair, predictable and transparent staff accountability systems and procedures are necessary to eliminate subjectivity, ”the finance ministry said.

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