Fearless banking. Banks can lend with more freedom, less fear

Despite ample liquidity, infusion of capital in public sector banks (PSBs), credit growth continued to be low. In a bank dependent economy, flow of credit is essential. More so when the economy is struggling to wriggle out the economic distress caused by the ongoing pandemic.

RBI data for June 2021 indicates a low credit growth at 6 per cent. Break up of data shows that it is abysmally low at 3.1 per cent in PSBs while private banks are better at 10.1 per cent. RBI pointed out that such risk averseness of banks could be self-defeating.

The root cause for risk shyness is fear of loan accounts going bad thereby inviting probe and staff accountability examination threatening career prospects and graceful retirement. Realising the collateral damage caused due to increasing asset quality woes, the government had resolved to address the crux of the problem. Formation of Bad Bank may not be the panacea and addressing its cause will be essential.

In this background, the staff accountability framework (SAF) has been suggested to allay the fears of bank employees using a four-tier approach.

Tier-I loans

It is observed that such low-ticket size loans (up to ₹1 million) usually flow under government sponsored schemes to small units, small traders, small and marginal farmers, collateral free loans under micro finance schemes. The credit risk assessment in these kinds of loans is driven by digital algorithms/templates and pre-designed schemes with low human intervention. The borrower community under this tier neither has the financial literacy nor credit history.

Unless there is a prima facie inkling of malafide intentions, staff accountability for NPAs up to ₹1 million is waived. This limit could be increased to ₹2 million by domestic – systemically important banks (D-SIBs) at the discretion of their board. They have better capital buffers and rigid risk management architecture. This approach will pull out many NPAs accounts from the orbit of staff accountability.

Tier – II loans

These loans (above ₹10 million) are granted for housing, car, mortgage and to business units. They are processed at centralised back offices and not specifically at branches. They use lending automation templates, built-in digital algorithms and information drawn from aggregators with low use of discretion. They have support of empanelled advocates and valuers.

The credit risk assessment and appraisal are done by people with domain knowledge within the loan policy and exposure norms. The discretion powers rest with processing centres and may not necessarily be with branches. They have more of digital component as inputs. The documentation, disbursement, monitoring and follow up activities are with branches. Hence, if a loan under this segment becomes NPA, a committee will be formed at regional/controlling offices to scan through and filter them following RBI norms. After thorough scrutiny from all angles it will separate: (i) NPA accounts that need staff accountability examination and (ii) those that do not need.

A summarised opinion with reasons is put up by the committee to the authority to enable taking a final view. If there are no adverse comments by internal and external auditors in the last four years on NPAs identified as not needing staff accountability and that they have adhered to the compliance standards, the staff accountability can be waived.

The rest of NPA accounts will be subjected to usual staff accountability examination. But inspection and audit department staff will not be involved in conducting staff accountability. But while conducting staff accountability examination, they should follow RBI guidance/norms. Standard operating procedure is to be followed in carrying out the task. This process will reduce the number of NPAs needing staff accountability examination to a large extent.

Tier – III loans

Loans between ₹10 million and ₹500 million are granted to business units by especially competent and domain experts at large centres well versed with the systems and procedures. NPA accounts under this category will undergo a preliminary examination by a committee constituted by one level higher than the sanctioning authority.

A detailed report on the account will be submitted to the committee covering the borrower profile with reasons leading to the account turning into NPA. The comments of the internal and external auditors of the last four years and compliance thereof will also be submitted to the committee. Preliminary examination by the committee will be based on all monitoring, follow up, compliance of observations of the auditors.

If the committee finds material lapses in the stages of sanction, disbursement, monitoring and follow up, the committee may at its discretion refer the NPA account to the controlling audit office/audit vertical for detailed staff accountability examination. The audit vertical will rely upon the observations/remarks of the external/internal auditors of the last four years and after conclusion of analysis shall submit report to the committee for taking final view. Institutionalisation of such systematic process will eliminate chances of bias and can reduce staff accountability cases.

Tier IV Accounts

In the large accounts (above ₹500 million), the usual staff accountability examination norms are to be followed as hitherto. In terms of guidelines of Chief Vigilance Commission (CVC), after examining staff accountability, the vigilance and non-vigilance angle is to be identified by the Internal Advisory Committee (IAC).

Thereafter, the recommendations of IAC where staff accountability is established will be referred to the chief vigilance officer (CVO) for vetting. The present SAF has fixed criteria for referring them to CVO.

(i) Banks with business of up to ₹10 trillion, the cases of ₹10 crore and above are to be sent to CVO. (ii) Banks with business of over ₹10 trillion and up to ₹25 trillion can refer cases of ₹30 crore and above. (iii) Banks with business of over ₹25 trillion may refer cases of ₹50 crore and above. The business level is to be arrived at on the basis of last financial year.

These cut-offs can be lowered by the bank’s board at its discretion.

The SAF shall come into force for accounts classified as NPAs from April 1, 2022 and all staff accountability, wherever needed have to be completed within six months from the date of classification of loans as NPA.

These timelines will provide lot of relief to the credit decision makers.

There need not be prolonged wait for completion of the staff accountability. There will be several challenges in implementing the framework.

The employees will have to be trained and briefed about the letter and spirit of SAF but, going forward, it will be a morale booster to employees to revive the credit risk appetite of banks.

The writer is Adjunct Professor, Institute of Insurance and Risk Management – IIRM. Hyderabad. Views expressed are personal

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