How the new bad debt standards will affect PSB staff


The Ministry of Finance has proposed uniform standards for staff accountability in public sector banks (PSBs) based on the size of bad debts to assure bankers that only malicious intent will be punished, not genuine decisions. Mint is considering this proposal.

What is the proposed new policy?

Public banks conduct accountability exercises to assess why a loan goes wrong, and each bank has its own set of internal guidelines. A loan can go wrong for reasons beyond the promoter’s control and therefore could be a real business failure, but some have also gone wrong due to lack of due diligence before sanctioning. As of April 1, 2022, the government proposed a four-tier structure, based on loan value, for loans up to ??50 crore and asked banks to revise their liability policies.

What was the need for new standards?

The ministry has started talks with the Central Vigilance Commission on updating existing staff accountability standards. One of the main reasons was to follow the evolution of banking dynamics, in particular with regard to the way in which loans are sanctioned. Penalties and loan evaluations of up to ??5 crore in mortgages and other retail categories are increasingly being carried out outside branches with the help of new technologies. The new standards also recognize the amount of resources used to assess liability for small loans and thereby exempt loans up to??10 lakh of such exercises, unless they are labeled as fraudulent.

How have lenders reacted to this policy?

The Association of Indian Banks (IBA) said the staff accountability exercise is currently carried out for all non-performing assets (NPAs) regardless of their size. This approach, he said, not only negatively affects staff morale, but also puts enormous strain on the bank’s resources. He believes the new guidelines will boost the morale of public sector bankers.

What could be the impact?

In private conversations, bankers have long expressed concerns about punitive measures taken when large loans go wrong. This is what they call the fear of the Three Cs, the Central Bureau of Investigation, Comptroller and Auditor General of India, and the Central Vigilance Commission among the staff of public sector banks. Such apprehensions have had an impact on business decisions, as employees do not want to be held accountable for loans that go wrong, even if they strictly follow internal policies.

What are some of the valuation caveats?

The ministry said the review of disqualifications should take into account the prevailing circumstances at the relevant time. Care should be taken to consider whether the business decision taken was in good faith or whether it was intentional negligence. Banks should also fix liability after determining which department within the lender is at fault. In an account that has gone bad due to improper control, responsibility should not be placed on the officials involved at the level of sanctions.

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