One of the villains in the Indian growth story is the poor state of capitalization of India’s public sector banks (PSBs). Most government majority-owned PSBs are among India’s largest banks and also have the largest exposure to stressed assets and sectors. Continued exposure to delinquent borrowers and fraudulent practices by borrowers of the PSBs has contributed to the declining credit quality of the loans made by the PSBs.
To improve the PSBs’ situation, the Reserve Bank of India (RBI) has taken steps such as introducing higher provisioning for restructured assets and guidelines for formation of a joint lenders forum to “work out” potentially stressed borrowers before they become non-performing assets. The RBI has also introduced changes to the prescriptions on wilful defaulters to make it more difficult for delinquent borrowers to access the credit markets. These measures apply not only to PSBs but to the banking sector in general (including Indian branches of foreign banks).
Following up on these measures, the RBI issued a circular on 7 May prescribing a framework to identify and deal with fraudulent accounts, and to develop appropriate risk control measures for such accounts. The framework, based on the recommendations of an RBI internal working group, seeks to direct the attention of banks to early detection and prevention of fraud, and prompt reporting to the RBI and any investigating agencies of any instance of fraud, without overly affecting the “normal conduct of business” and “risk taking ability” of banks.
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Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.
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