Banks to add new clause to tighten loan settlement norms

The loan defaulters who try to settle down their liabilities through one-time settlement scheme will find difficulty as public sector lenders are planning to add a clause that will bar them from withdrawing criminal cases against private persons, irrespective of a settlement.

This was decided in a recent meeting of 10 bank chiefs with officials from the Reserve Bank of India, Central Vigilance Commission and the Central Bureau of Investigation (CBI). The need to add such clause was considered necessary in view of the recent increase in cases of fraud. The officials who attended the meeting told Business Standard that there were several loopholes in the OTS scheme therefore it became necessary to take such step. Moreover banks did not have any uniform policy for the amount on which a settlement could be made.

Public sector banks mainly got into OTS schemes with borrowers in order to recover a part of the outstanding amount and minimize the losses on account of non-performing assets (NPAs). In the recent past, banks have gone in for an OTS scheme multiple times with the same borrower for the same or less than the settlement money received earlier.

According to a bank executive, “Banks have to rely on collaterals (as the underlying asset) for OTS schemes as primary securities are not available by the time the fraud surfaces. Instructions were issued for the OTS scheme and sharing of information on the borrower's accounts among the multiple financing banks.”

It has also been noticed that securities are distress-valued and, in case the collateral amount is more than the loan outstanding, the settlement is done on a lesser amount. Also, CBI officials said that the banks do not report about all the frauds.

As per RBI data, out of the 44 cases of frauds of Rs 1 crore or more, banks did not reported about 33 cases. The Central Vigilance Commissioner said, “Banks reported there is hesitation on the part of CBI to take up cases of frauds involving over Rs 1 crore.” During 2008-09, according to RBI report, public sector banks reported about only 3,425 frauds as against 3,004 in the previous year, representing an increase of 14 per cent.