The Central Vigilance Commission (CVC) wants banks to be extra cautious while sanctioning loans, in light of the recent scandal involving alleged bribes in exchange for credit limit enhancement at Syndicate Bank. In a letter to the finance ministry, the vigilance authority has pointed out that some banks were not following procedures while approving loans.

This has put the state-run banks in a bind. The economy is poised to revive and the Reserve Bank of India has prepared the ground for an expected surge in loans on account of this, kicking off a virtuous cycle of investment leading to more jobs and further acceleration in growth. It is in this scenario that banks are being asked to closely adhere to the rules. A chairman of a state-run bank said such messages will further erode the confidence of employees — already shaky given the push to open up cases where wrongdoing may have occurred — and that credit growth will suffer as a consequence.

“Some months ago we were talking about policy paralysis now we will see ‘loan paralysis’ if we continue to scrutinise every business decision from a vigilance point of view,” said the executive, who didn’t want to be named. Annual credit growth has fallen below 10% for the first time since October 2009. As of September 5, it stood at 9.68% from the previous year. RBI expects credit growth to pick up in the second half of 2014-15 as industrial recovery gains momentum and has eased norms to free up the amount of money banks can lend.

According to a government official aware of developments, the vigilance authority has pointed out a case where a loan was sanctioned before it was documented in the minutes of the credit appraisal committee meeting. “While the credit appraisal committee had approved the loan sanction, later there were differences between the executive director and the bank chairman, and therefore it did not find place in the minutes of the meeting,” said the official, adding that this led to vigilance complaints. Bankers are alarmed about the renewed message on abiding by the rules.

“What one should understand is that banking is a dynamic business. Certain decisions need to be taken in principle and the paperwork can follow,” said the executive director of a state-run bank, adding that waiting for the paperwork to get done can lead to loss of business. Another banker said banks follow all prudential lending norms before sanctioning any loan, indicating that the CVC message was unnecessary. “There may have been some cases where there was regulatory oversight but most bankers follow all the norms as it is their job which is on the line,” he said, asking not be named.

The scrutiny on banks has increased in recent times after then Syndicate Bank chairman SK Jain was arrested in August by the CBI for allegedly accepting bribes to enhance the credit limit of some companies. CBI has highlighted allegations that some candidates were appointed to senior banking posts despite adverse annual confidential reports (ACRs), suggesting that this could have been achieved through the manipulation of the marks awarded during the interview process.

“In a scenario where bad loans are increasing, there ought to be some concern over lending practices. Banks can avoid such instances if they follow the laid down norms,” said a finance ministry official. Gross non-performing assets of state-run banks touched Rs 2.16 lakh crore at the end of March, an increase of 39% over the previous fiscal.