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Concerned that the loans they acquire from other banks could turn out to be lemons, the Finance Ministry has issued guidelines to public sector banks.
This move is to prevent unethical/unjustified takeover of loans. The ministry has come up with the guidelines as the Central Vigilance Commission (CVC) has noticed that sometimes existing loan accounts which are already showing signs of sickness with one bank are taken over by another bank.
Such loan accounts, predictably, turn non-performing within a short-time in the bank that has taken over the account.
Guidelines
As per the guidelines, banks must put in place a board-approved policy for taking over loan accounts from another bank. Banks, normally, can take over only those loans whose credit ratings are above the level approved by the board.
Concessions — lower interest rates on loans and charges for non-fund-based facilities — to taken over loan accounts can be extended only in extremely deserving cases with specific reasons recorded in writing.
Due diligence
In all cases of take over of loan accounts, the ministry emphasised that due diligence, including visiting the prospective customer’s premises/factory, should be undertaken.
“A bank just cannot afford to depend on the credit report of another bank from whom it is taking over a loan account. It is possible that the report has been whitewashed to hide problems in the account,” said a senior public sector bank official.
Where a borrower seeks additional exposure from the bank that has taken over his loan account, the ministry said the guidelines of joint lending should be strictly applied.
All borrowers with individual credit limit of Rs 150 crore and above are covered under a joint lending arrangement, whereby banks have a holistic view of all banking relationships of a borrower so that frauds can be minimised.
Influence of officials
A public sector bank should not take over a loan account from another bank where any of its Executive Director or Chairman and Managing Director had worked earlier.
If such cases need to be taken over, the proposal should be put up to the board with specific reasons justifying the need for taking over the accounts.
The CVC has observed that some accounts shift from one bank to another as senior functionaries are elevated to the ranks of EDs and CMDs.
In this regard, the Commission has pointed out that sometimes even influence from senior officials, including directors on the board of banks, leads to the field-level staff as well as those working in credit departments of regional office/zonal office/head office coming under pressure.
In view of the ministry guidelines, public sector banks are expected to be more circumspect in taking over loan accounts from other banks.
The guidelines come at a time when the RBI’s ‘Financial Stability Report’ has expressed concern on banks’ loan quality.
The Report said an increase in slippage ratios, rise in the quantum of restructured assets and a high rate of growth in non-performing assets (NPAs) relative to credit growth implies that the concerns on asset quality of banks remain elevated.
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