Union Government Quadrupled Limits on Loans that a Bank’s Internal Committee can Approve

The Union government quadrupled (four times) the limits on loans that a bank’s internal committee can approve. The giovernment’s move is expected to quicken credit clearance at 26 state-run banks, including the Bank of Baroda and Punjab National Bank.

The government directed banks to set up a credit approval committee — comprising chairman, executive directors and three chief general managers who is to handle credit, finance and risk management functions.

The group can approve credit proposals up to Rs 400 crore. Currently, any loan above Rs 100 crore has to be vetted by the management committee of the board, which meet once a month, or 20 days. Under the old regime, a management committee of the board, which included a Reserve Bank of India nominee and two independent directors appointed by rotation, the bank’s chairman and managing director and executive directors, took these decisions.

The prescribed  limit is applicable on Category A banks with a business of Rs 3 lakh crore, while smaller public sector banks can use the same structure to approve loans up to Rs 250 crore. If a loan under consideration is higher than these limits, it would be take to the management board.

However those who oppose the move mentioned that the banking system need to have a robust credit risk management policy, otherwise it may result into increase in nonperforming assets.

The credit approval committee replaced the board’s management committee. The two are significantly different.

The MCB has outside members as well such as RBI nominee and independent directors, the new committee on the other hand comprises two EDs and chief general managers, who report to the CMD.