Finance ministry bans PSU banks from taking over loan accounts

The finance ministry has banned public sector banks from taking over loan accounts from lenders where their current chairman and managing director (CMD) or executive director (ED) had worked earlier. 

The ministry had in June issued draft guidelines on 'takeover of loans' in which it had suggested that CMDs should declare whether they were part of the decision-making process in sanctioning loans in their previous assignments for accounts that have migrated to their current banks. 

Now, in the final guidelines, the ministry has virtually restricted takeover of loan accounts if the takeover has trailed the top management - the CMD or ED. "No case should be taken over by bank from any bank where its ED or CMD has worked earlier," said a letter from the ministry to banks. 

The ministry has, however, said if a bank wants to take over loan accounts from the bank where the top management had worked before, it can put the proposal to the board and "it needs to be justified". 

While giving an overall rationale for restricting the takeover of loan, the ministry has indicated that poaching loans from another bank may result in unhealthy practices and may also result in bad loans. The ministry has said there have been instances of an account turning sick soon after a bank poaching it from a rival. 

Therefore, such "takeover of loans should be done only on merit basis", the ministry's note said. It has directed banks not to grant any concession to the borrower at the time of taking over a loan from another bank. 

In its draft norms, the ministry had pointed out that very often, to growth their loan books, banks were willing to refinance a borrower at concessional rate vis-a-vis the rival bank. At times, banks were willing to offer liberal terms such as lower ratio or collateral or longer duration of loan to poach customers from other banks. (Economic Times)