Efficacy of Credit Approval Committees in Public Sector Banks
In 2012, Government of India had directed creation of a mechanism of sanction of credit limits by Committees in all Public Sector Banks, replacing the earlier system of sanction by a single authority, in cases other than sanction by branch heads/managers. Most probably the rationale behind such a direction could have been that a group of senior and knowledgeable executives, acting in good faith and exercising their combined wisdom, will arrive at an informed decision enhancing the quality of credit with an increased speed. This also meant that the discretionary powers hitherto vested in the hands of unscrupulous and corrupt Zonal/Regional/Circle Heads and CMDs/EDs were taken away reposing faith in the proposed Committees.
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Accordingly, various committees were created in all PSBs at different levels, viz., Zonal Level Credit Committee headed by the Zonal Manager and/or Regional Level Credit Committee headed by the Regional Manager and/or Circle Level Credit Committee headed by Circle Head etc, depending upon the organisational structure of the individual banks. The idea was that the respective Committees would facilitate a faster, transparent and genuine decisions, compared to the Head of the Committee singly acting in his/her discretion, based on the legitimate credit requirements and financials of the borrowers. This would have undoubtedly been true if the Head of the Committee is a clean person of impeccable integrity and deliberations are held in a congenial atmosphere where all the other members subordinate to him/her are free to express their ideas and record objections. But a dispassionate analysis of the working of Committee system in various banks would broadly reveal the following:
(i) On some occasions, if not many,credit proposals are pushed through at the instance of the head of the Committee, while all other members, who are subordinate in rank, passively become a part of the sanction.
(ii) Very few members have the courage to go against the diktats of the Committee Head, superior in position, for fear of retribution, victimization, transfer, bad appraisal, etc.
(iii) Agenda of the Committee meetings is not circulated sufficiently in advance to enable the members peruse the proposals in depth to arrive at a considered decision thereby defeating the very purpose of the mechanism. Committee meetings are often held in a perfunctory manner.
(iv) Sometimes a tendency of complacency arises amongst some members on the misplaced faith that other members would have studied the proposals which goes against the rationale behind Committee system that an informed decision is taken based on the combined wisdom of all members.
(v) It would not be an exaggeration to say that in a few cases, members of the Committee append their signatures on the proposals at a later stage, despite their absence during the deliberations, solely relying on the signatures of other members. The absence might be due to a variety of reasons, like official camp in some other place, meetings with customers, etc.
(vi) The ill-founded tendency that fixing of responsibility may be toned down because of the presence of senior executives in the committee in case the account turns bad, often becomes the guiding factor in sanction of loans.
(vii) Cursory analysis of the relevant data reveals that loans sanctioned by Committeeshave resulted in larger number and quantum of NPAs/Frauds when compared to sanction by a single authority. Such loans become nobody’s baby.
All the above are not mere perceptions but facts which I have to come to know by virtue of being an advocate and interacting with a couple of senior functionaries of many PSBs.
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Committee sanction or individual, loan proposals are always processed by officials of the credit department who have reasonable expertise and placed before the sanctioning authority with appropriate recommendations. An extensive appraisal is done based on the financial statements, CA certificates, due diligence exercise (internal or third party), confidential opinions from other banks, market enquiries, net worth of the promoters / partners / proprietors,industry scenario, etc. The process of appraisal and recommendations being the same, there is no reason why a considered decision cannot be taken by a single individual with all the relevant information at his disposal, as good as, if not better, when compared to a Committee. Conversely, there would not be anything spectacular with the decision a Committee as against sanction by a single authority, given the same background, facts and circumstances. It only depends upon the capabilities and knowledge levels of the decision-making Executive who is supposed to possess such skills when occupying a high position.
In case mala fides are observed in the sanction of credit limits, fixing of liability would be easier if the sanction in question is by a single person/authority. However in Committee sanctions, fixing accountability would be difficult because apportioning blame to all Executives concerned involves practical problems. Sometimes it happens that honest officials who would have signed the sanction note in good faith without obtaining any undue benefit or financial accommodation, also are treated on par with the culpable officials. Their troubles are compounded further if the account is treated as fraud and a complaint is filed with the CBI. Treatment of the officials under scanner by the CBI is worth a separate article.
Though any bank official would accept the ills of Committee system in private, nobody would dare to speak out openly for obvious reasons. It is reliably learnt that recently the Central Vigilance Commission had called for the views of all PSBs on the efficacy of Credit Approval Committees but it would be naive on the part of CVC to assume that the PSBs would submit frank and candid opinions. I wonder whether any PSB had ever donethat (expressing frank views)to any Governmental or Regulatory agency viz., DFS, RBI, CVC, et al. Ultimately it may be concluded that the Committee system for credit sanctions in PSBs has failed in its intended purpose and therefore needs to be revisited. CVC or DFS or RBI: who will bell the cat?
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