The finance ministry wants public sector banks (PSBs) to revert to a system that gave ?clearly defined? powers to individual officers to approve/reject credit proposals. The idea is to fix responsibility, given the current system of ?collective decision-making? allows officers to shift the blame for wrong approvals.
The move is prompted by the increase in non-performing assets (NPA) at PSBs, from R1.64 lakh crore at March end 2013 to R2.28 lakh crore at December end, 2013. Currently, decisions on credit applications are taken in a collective manner through a credit committee/approval grid.
Sources said the finance ministry has had a round of discussions with some PSBs in this regard, and will reach out to others too before a final decision is taken. They said if PSBs had been following the individual-based system, it would have been easier to find out who is responsible for negligent/deficient/wrongful credit approval/rejection practices, one reason for the rise in NPAs, and particularly an increase in large-value advances-related frauds in these banks.
In the committee-based system, the responsibility is diffused and, therefore, even in cases like the crisis-ridden United Bank of India ? which saw a sudden jump in NPAs ? it was difficult to hold certain individual(s) responsible for their actions, the sources said.
PSB officials FE spoke to, however, defended the committee-based approach as it involves the ?collective wisdom? of panel members who are experts in their respective fields, such as risk management, finance and credit policies. Besides, in the individual-based system, much power is concentrated in one person, which can also lead to its misuse/abuse, they opined.
Prior to April 2012, PSBs, barring State Bank of India (which has been following the committee-based system for a long time), followed the individual officer-centric system, where each bank, depending on the size of its balance sheet, delegated powers to officers at various levels to take decisions on the basis of the amount and the risk involved in the credit proposals. In this system, senior and experienced officers took a call on credit proposals involving high amounts and high risk. However, there were complaints of delays in decisions in credit sanctioning and disbursal in the individual officer-centric system.
Then, after consultations with banks, the ministry had in a directive in April 2012 asked PSBs to adopt the committee-based system. The committee-based system was aimed at expediting credit proposal decisions as the individual bank officers were earlier increasingly resorting to ?upward delegation? or forwarding the proposals to their seniors, which resulted in several cases pending before the head office.
The RBI found that credit-related frauds were due to a deficient appraisal system, poor post-disbursement supervision and inadequate follow up, KC Chakrabarty, the RBI deputy governor who recently demitted office, had said last year, adding that fixing of staff accountability is an area demanding urgent attention by banks.