Bankers get shield from fraud heat; boards of PSBs to be held accountable

The government has watered down its framework for dealing with high-value frauds in a bid to encourage managing directors (MDs) and chief executive officers (CEOs) of state-owned banks to take commercial decisions fearlessly.

Instead of MDs and CEOs, the boards of public sector banks (PSBs) will now be held accountable for the various regulator-prescribed timelines for reporting or investigating frauds above Rs 50 crore, according to a directive sent by the finance ministry to banks.

The finance ministry had in May 2015 created the framework on “timely detection, reporting, and investigation” relating to large-value bank frauds. “The overall responsibility” for ensuring compliance with the various timelines being laid down by the Reserve Bank of India (RBI) in its circular related to reporting of fraud was that of CEOs of PSBs in the 2015 circular. The RBI has prescribed banks to follow a timeline to report different levels of bank frauds to the police, regulators, and investigative agencies. 

“Powers have been delegated by the Department of Financial Services to the boards of public sector lenders to put in place a suitable mechanism for ensuring compliance of the various timelines laid down in the RBI and  Central Vigilance Commission (CVC) circular(s),” the ministry said in a statement on Tuesday.

Indian Banks’ Association CEO Sunil Mehta, the former MD and CEO of Punjab National Bank, said vesting the responsibility with chief executives was a deterrent in taking decisions. “With this, there will be a sense of collective responsibility as the boards of banks also have representatives of the government and the RBI,” Mehta said, adding it would ensure speedier commercial decisions.

Additionally, instead of the banks compulsorily examining the angle of fraud in all loan accounts above Rs 50 crore which have turned into non-performing assets, such cases will now be referred to a panel set up by the CVC. 

In August last year, the CVC had formed the Advisory Board for Banking Frauds, headed by former vigilance commissioner T M Bhasin, to examine bank frauds over Rs 50 crore and recommend action before an official inquiry begins.

“The move will ensure that the reporting of fraud does not become an individual responsibility but a collective one,” said a senior finance ministry official.

In a separate directive to banks, the government has asked them to set up a committee of senior officers to monitor the progress of pending disciplinary and internal vigilance cases. PSBs will have to categorise the pending cases “according to severity” and the number of years since when the case has been lingering. The banks are expected to set up the committee and hold its first meeting in the next 10 days, the ministry official said.

These steps are in line with the government’s conscious tactic to soothe the nerves of bankers who have shown reluctance in taking commercial decisions due to the fear of probe agencies. The Centre has time and again stressed in the past few years that it would make a distinction between “genuine commercial failures and culpability”.

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