Explained: When can PSU bank staff be probed for NPAs?

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Recently the Finance Ministry has issued a fresh set of norms to guide state-owned banks in adopting a uniform staff accountability framework for non-performing assets (NPAs) up to Rs 50 crore.

What are the reasons for the introduction of accountability guidelines for PSBs?

The extremely cautious and risk-aversive approach of PSBs: The Punjab National Bank fraud in 2018 and a series of other unrelated frauds and tough action against bank officials led to a situation where PSBs stalling credit deployment and impacting economic growth.

Fear of 3Cs: In 2019, the Finance Minister mentions that Officials of the bank fear the scrutiny of “3Cs – CBI (Central Bureau of Investigation), CVC (Central Vigilance Commission) and CAG (Comptroller and Auditor General)” and holding banking decisions.

What can be done to improve PSBs performance further?

Solving the accountability issue of PSBs is a good step, but the government needs wider reforms to address the core issues,

1. Strengthen their credit-appraisal system: To sharpen PSBS credit-pricing skills and reduce loan write-offs, 2. Providing regulatory powers to RBI to regulate PSBs like they regulate private banks, 3. Guaranteed functional autonomy for PSBs and adequate opportunities to defend in case of investigations, 4. Alignment of job incentives with commercial outcomes.

All these will increase 1. The lending confidence of PSBs, 2. Instil discipline among PSBs, 3. Reduce NPAs and Frauds, 4. Improve the operational efficiency of PSBs and 5. Raise the valuations of banks put up for privatization.

Source: This post is based on the following articles

• “Banking accountability” published in Business Standard on 3rd November 2021.
• “Explained: When can PSU bank staff be probed for NPAs?” published in Indian Express on 3rd November 2021.