PRESENTATION on 28-05-2015 by

K. Ram MohanChief General ManagerPunjab National Bank

VIGILANCE IN BANKS & FINANCIAL INSTITUTIONS.

VIGILANCE ANGLE BROAD DEFINITIONAlthough formulation of a precise definition is almost impossible, generally a vigilance angle could be perceptible in cases characterised by:•commission of criminal offences like demand and acceptance of illegal gratification, possession of disproportionate assets, forgery, cheating, abuse of official position with a view to obtaining pecuniary benefits advantage for self or for any other person;•irregularities reflecting adversely on the integrity of the public servant;•lapses involving gross or wilful negligence, recklessness, failure to report to competent authorities, exercise of discretion without or in excess of powers/jurisdiction, cause of undue loss or a concomitant gain to an individual or a set of individuals/a party or parties and flagrant violation of systems and procedures.

VIGILANCE ANGLE Vigilance angle is characterized by any of the following:-•Commission of criminal offences like demand and acceptance of illegal gratification•Possession of disproportionate assets•Forgery•Cheating•Abuse of official position with a view to obtaining pecuniary benefit.Irregularities reflecting adversely on the integrity of the public servant

Lapses involving Gross negligence1. Lapses involving Recklessness2. Lapses involving failure to report to

competent authorities, exercise of discretion/powers without or in excess of powers/jurisdiction.

3. Lapses involving cause of undue loss or concomitant gain to an individual or a set of individuals/a party or parties

4. Lapses involving flagrant violation of system and procedures.

VIGILANCE PERCEPTION•Vigilance activity in Banks forms an integral part of managerial functions and such activity is not intended to reduce but to enhance the level of managerial efficiency.•Every loss caused to the bank does not become the subject matter of vigilance enquiry. However, motivated and reckless decisions should not be ignored.•Distinction has to be drawn between malafide and bonafides.•While bonafides could be accepted as a normal part of business and ignored, malafide has to be viewed adversely and dealt with under the extant disciplinary procedures.

PREVENTIVE VIGILANCE Santhanam Committee, while outlining the preventive measures, that should be taken to significantly reduce corruption, had identified four major causes of corruption, viz. (i) administrative delays; (ii) Government taking upon themselves more than what they can manage by way of regulatory functions; (iii) scope for personal discretion in the exercise of powers vested in different categories of government servants; and (iv) cumbersome procedures of dealing with various matters which are of importance to citizens in their day to day affairs.

PREVENTION IS BETTER THAN CURE

LET US NOW SEE SOME OF THE IMPORTANT ASPECTS OF

PREVENTIVE VIGILANCE STEPSUNDER VARIOUS ASPECTS OF

BANKING AND FINANCE.

A-1 ACCOUNT OPENING1. Ensure that while opening deposit accounts, related

documents are got completed in the presence of authorized official from the Bank and handing over the related documents to the middle men is avoided. Ensure that the account opening formalities are completed at the Bank premises and no document is allowed to be taken out for execution. Independent verification of address in all accounts is an integral part of the procedure for opening of account. In case the registered letter sent is received back undelivered, extra caution should be exercised while permitting transactions.

2. Ensure that in all new accounts, at least one photograph of the account holders are obtained for all categories of accounts.

3. Refund orders, dividend/interest warrants may not be accepted in newly opened accounts if the related account is opened subsequent to the date of issue of such instruments as appearing on the face of the instrument.

REMITTANCESRTGS, NEFT, Internet Banking, SWIFT – Salient features and compliance of guidelines : 1. Affix transparent plain cello tapes on all drafts and Fixed

Deposit Receipts at the space meant for amount in figures irrespective of the amount.

2. Ensure that no draft, cash order, TPO, Telegraphic Transfer and RTCs for Rs. 50,000/- and above are issued against receipt of cash. These guidelines also prohibit payment of cash against such instruments.

3. Ensure to use rubber stamp mentioning that the draft is singly signed as it is below Rs. 25,000/- at the space meant for second signatory, on all drafts below Rs. 25,000/-.

4. While issuing drafts, holes are punched with the help of punching pliers in the appropriate cages provided on the left and right sides, taking care that the hole does not extend to the adjoining cage.

5. Examination of various payment instruments is part of the system and the instruments should be paid after verification under ultra-violet lamps & magnifying glass.

B-1 PRE-SANCTION STAGEThe major reason for the advances being turned Non-Performing Asset is improper and inadequate pre-sanction appraisal. Some of the important DOs and DON’Ts at the pre-sanction stage are as follows:1. Authenticated data about financial standing of the parties is

kept on records and Credit reports/credit opinion on borrowers/guarantors as well as no objection certificate is received, wherever required.

2. Wherever prescribed, audited Balance Sheets are obtained from the borrower. In other cases Balance Sheets should be verified from the genuine books.

3. Borrower’s antecedents are verified to judge his intentions, capacity, potential and managerial capabilities etc. in a proper and meticulous way.

4. Ensure that the project is technically feasible and economically viable.

5. Pre-sanction inspection is made properly and objectively, cross checking the applicant’s claim

6. Ensure that detailed and warranted enquiries are made into Group concerns/associate concerns/Associates, etc.

7. Borrower is also assessed on the basis of 3 Cs – Character, Capital and capacity.

8. Actual credit requirements are assessed based on projections in accordance with the prescribed norms and all government/RBIs norms/stipulation are properly adhered to.

9. Security offered is adequate and proper and is valued properly.

10. Administrative clearance is obtained from the controlling authorities, if required.

11. Credit reports and limits are renewed at prescribed intervals and existing defects/irregularities are removed.

12. Projected level of Current Assets and Current Liabilities are reasonable and in tune with actual requirements.

13. Non fund based limits carry the risk of devolvement and as such these should be assessed more judiciously.

14. In case of existing borrowers, all the parameters considered for earlier sanction should be properly reviewed and compared with actuals.

15. Cases of over accommodation are not put up to the authorities for confirmation along with the renewal proposal but should be put up to the authorities as per extant guidelines available whenever discretion has been exceeded.

16. Pre sanction inspection/visit is made at the site/party’s office/premises to have a first hand judgement about party’s credit worthiness.

17. Industry-wise analysis to compare operational parameters/ standards is done in respect of large borrowers.

18. It should also be ensured that the party (especially in case of Ltd. companies) must be competent to contract and be authorized by proper resolution to apply and avail loan from the bank.

19. It should be meticulously ensured that party is not overstating the price of asset to be financed.

20. Ensure to mention stipulation like strengthening the capital base of the party in case the capital base of the party is weak and such stipulations are complied with before disbursements.

21. Ensure that takeover guidelines are meticulously followed.

22.Ensure that in case of Borrower availing credit facilities from other Banks in consortium/ syndication/ multiple banking arrangement bring required No Objection Certificate from them.

23.Ensure that a clause is incorporated that the borrower would require NOC from the Bank for availing credit facilities from other Bank/Financial Institutions, further expansion of business, taking up a new business activity of setting up/investing in subsidiary whether in the same business line or unrelated business.

24.Old accounts need more closure scrutiny as the first generation owners are replaced by the next generation. In such accounts status of the customer should more critically be analyzed while renewing the limits

B-2 SANCTION STAGE1. Ensure that powers are exercised

in a judicious way.2. All the RBI/Bank’s guidelines are

followed. 3. Ensure that proper replies to all

the queries raised have been received.

4. Project under consideration is bankable and activity to be financed is approved one.

B-3 DOCUMENTATION STAGE1. It should be ensured with precision that documents are

executed as per terms of sanction.2. In case E.M. is to be created, it is also to be ensured that

original title deeds are placed on record along with non-encumbrance certificate from bank’s approved advocate.

3. Personal guarantee wherever these exist must be obtained.4. Insurance cover, with usual bank clause to guard bank’s

interest, must be obtained when such term exist.5. In case of limited companies, charges must be registered

with ROC for each facility.6. Balance confirmation letters are obtained on periodic

prescribed intervals.7. In case of consortium/ syndicated advances, guidelines laid

down by the bank to sanction, documentation and follow up must be adhered to and minutes of consortium meeting must be kept on record.

B-4 DISBURSEMENT STAGE1. Disbursement of advance should only be made

after proper sanction, documentation and necessary approval of authorities.

2. Deviation from terms of sanction can only be permitted with proper permission of the sanctioning authority.

3. Disbursement should only be made direct to suppliers as per terms of sanction.

4. Operation in cash credit/other borrowal accounts should be properly monitored and end use of funds/limit must be verified for which post disbursement inspection is very much required.

5. Diversion of funds should not be permitted.

5. Operations in the accounts should be properly monitored and drawls of Rs.50 lacs and above in large borrowal accounts, particularly with Working Capital of Rs.10 crores and above from the entire banking system must be scrutinized.

6. Huge cash drawls should not be allowed and Post Disbursement Inspection is properly done.

7. Insurance on assets is ensured.8. Frequent excess drawings

disproportionate to the limit sanctioned/actual requirements should not be allowed and necessary confirmation wherever required is obtained as per extant guidelines available.

B-5 FOLLOW-UP STAGE1. Annual reviews of accounts should be done.2. Stock inspections are done properly and wherever stock

audit is prescribed, the same is done invariably.3. Follow up of recovery of installments in term loans is made

as and when they fall due and over dues are not allowed to accumulate.

4. Credit reports on borrower/guarantors are updated periodically.

5. Documents are not allowed to get time-barred 6. Irregularities pointed out in the inspection/ audit reports are

properly rectified and it is to be ensured that such irregularities do not recur.

7. Review of account is done as a post disbursement follow up measures to detect warning signals and to initiate necessary corrective measures but not in a routine manner solely with a view to remove the account from the list of un-reviewed accounts.

8. Incipient sickness is detected in time and wherever it is detected, action is taken and things are not allowed to drift.

C-3 FOREIGN EXCHANGE GENERAL1. Invariably ensure release of foreign exchange within ECM limits and

keep a record of part releases.2. Ensure verification of purpose of inward remittance, if than USD

10000.003. Non- resident accounts must be opened as per Bank guidelines.

Currency notes/Traveller cheques must be deposited by the depositor himself.

4. Ensure that the identity of depositor is verified by the documents prescribed.

5. Fixed deposit receipts should always be handed over personally or be sent to the depositor directly against acknowledgement.

6. Loans against NRE/FCNR (B) deposits to third parties should be granted when the depositor himself executes the loan documents in the presence of Bank officials and a witness acceptable to the Bank. Advances to third parties should not be granted on the basis of power of attorney.

7. Any loan account should have been adjusted with the funds from local sources of NRIs, if the interest has been charged as per RBI guidelines.

8. In case of acceptance of Foreign contribution under Foreign Contribution (Regulation) Act, 1976, ensure that prior permission from the Government of India has been received by the recipients before actually affording credits to their Accounts.

9. Ensure that the accounts are opened with the funds received from abroad and received through normal Banking channels.

WHAT EVER SAID UNDER PREVENTIVE VIGILANCE WILL BECOME ISSUES OF VIGILANCE, IF A VIGILANCE OVERTONE IS PERCEIVED IN A CASE.

SO WHY ALLOW A VIGILANCE CASE, WHEN WE HAVE AMPLE

OPPORTUNITY TO PREVENT OCCURANCE OF SUCH AN ACT

OR OMISSION.

Based on our analysis of large value advance related fraud cases, I would like to highlight following issues for closer scrutiny by the vigilance administration in banks:1. Holding lower rung officials accountable for frauds even though the

sanctioning of advances is usually at the level of senior executives/Board

2.  The officials at junior level should be brought under the ambit of probe for accountability only if there is deficiency at the monitoring/implementation level

3. Dragging in too many people in the ambit of probe not only delays the process but also scuttles the identification of actual perpetrators

4. Establishing accountability in all member banks even in the case of consortium/Multiple Banking arrangements where there is common tendency on part of the  member banks to absolve themselves of all responsibilities and squarely blame the lead bank for deficient credit appraisal/ post-disbursement monitoring

RBI FINDINGS ON VIGILANCE CASES IN BANKS

•Know the essence of the vigilance function - What is expected of you?

•Evaluate decisions against two tests – Was it for the good of the organisation? Was it done at the cost of the public /common good?

•Have an open and inquisitive mind - Be aware of things that may affect the interests and good governance in your respective organizations

•When the rest of the organisation is looking to push business interests, focus on ensuring that ethics and values are not lost sight of

Dr. K.C. CHAKRABARTHY, Ex DG RBI SAID

THANK YOU