Bankers Want Reforms In Loan Renewals In 'Related Party' Matter Of Board
In a recent revelation, the inclusion of relatives such as brothers, in-laws, or stepsisters on the board of directors of borrower companies has posed a challenge for board members. Despite the cumbersome nature of such appointments, board members acknowledge the undeniable links with borrower companies, raising ethical concerns within the banking sector.
The discussion surrounding quid pro quo arrangements has gained traction in Parliament, shedding light on a pertinent issue within the financial landscape.
Under the Banking Regulation Act of 1949, banks are prohibited from lending beyond Rs 5 crore to any company unless sanctioned by the board of directors or management committee.
The act specifies that a 'relative' of any of the bank's directors cannot be a partner, guarantor, major shareholder, or hold a position on the board of the borrower or in control of the borrowing company in such 'related party cases.' The bank's audit committee ensures transactions in such cases adhere to arm's length pricing principles, allowing market-related interest to be charged on the loan.
The process of identifying these links has become an administrative nightmare for many high-profile banks due to the rapid expansion of businesses and a plethora of credible names vying for board positions, resulting in overlapping directors.
In response to these challenges, lenders are calling for a revision of this age-old rule from regulators. A senior banker emphasized the need for the Reserve Bank of India (RBI) to revisit the regulation, advocating for a separation of bank boards from the process involving proposals for loan renewals in 'related party' matters.
"There are so many cross-directorships, and this has put a burden on boards. Strictly speaking, it's not the boards' job. Boards should prioritize policy issues," stated the senior banker.
The rationale behind the existing regulations, as outlined in an old RBI circular, is rooted in instances where banks developed informal arrangements for extending credit facilities to each other's directors and relatives, bypassing usual procedures and norms. The circular highlighted the need to prevent facilities far beyond sanctioned limits and concessions in the operation of individual accounts of the parties involved.
While there is no legally binding provision preventing a bank from providing credit facilities to a director of another bank or their relatives, concerns have been raised in Parliament about the ethical implications of such quid pro quo arrangements.
Addressing the issue, another source noted that the regulation does not differentiate between newly sanctioned loans and renewals of existing loans in connected and related party loan cases. The source suggested that for annual renewals of companies' working capital limits, prior approval or knowledge of the boards should not be mandatory, calling for a reconsideration of this requirement.
The topic of tracking related parties was discussed among chief executives of banks in a recent meeting, leading to a consensus that if there are no changes in the tenor of the loan, the interest rate, or other terms, there is no rationale to refer hundreds of loan renewal decisions to the board or the board committee.
