Tighter regulations for takeover of loans for state owned banks
By Joseph Samson
Jul 9, 2012
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For the second time in less than a month, the finance ministry has asked the public sector banks to be cautious while taking over loans from another bank. Last month the ministry had aslo asked the banks last month to not to 'poach' other banks' loan accounts and get into unhealthy practices.

The new regulations come as the central vigilance commission noticed taken over loans turning nonperforming.

Takeover of loans is the practice of one bank taking over the loan account of the customer from another bank. Banks lure the customers by offering low interest rates, extended tenures, and liberal collateral norms.

Such loans become nonperforming within a short period of being taken over. The guidelines suggest approval of the board before taking over of the loan. The ministry also added that concessions on such loans should only be given in extreme cases.

The ministry also stated maintaining a strict due-deiigence and inspecting the property/asset of the customer before takeover of the account. In case of the customer needs more exposure, joint lending approach should be applied. Joint lending is available to customers with limits over Rs. 150 crore.

Takeover of loans from the banks where the bank's executive director or Chairman and MD had previously worked should be avoided, and if the need arises, it should be approved by the board. This is because sometimes due to the pressure from the top, field level staff gets influenced.

The new guidelines have come after when the RBI's financial stability report for banks raised questions on the asset quality of the banks.


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