Bank Lending Decisions – Journal


In a broader context, the approval by a Senate panel of a bill to change the law governing banking companies reflects widespread frustration with the way banks and other financial institutions discriminate against loan applicants on the basis of their employment or profession while making credit decisions. The bill recommends jail time and fines for bank executives denying any borrower, including politicians, banking service on the basis of their social or economic class. The panel rightly pointed out that denial of credit and other banking services for any reason other than the creditworthiness of borrowers or other criteria prescribed by the State Bank amounts to a violation of fundamental and constitutional rights of citizens. .

But the proposed bill will not repair the wrongs done by the banks. On the contrary, the sanctions suggested for bank executives will put unnecessary pressure on them and damage the quality of their credit decisions. In 2008, a Delhi court criticized Indian banks for denying clean loans and credit cards to professionals such as lawyers and journalists based on what is known in banking jargon as a “profile negative”, even if they were in good financial health and met other criteria. The judge called it an “act of corporate authoritarianism”, rejecting the defense’s argument that the banks had discretion to choose their customers. But no one in India felt the need to pass new laws or punish bank executives. The court had ordered bankers to follow central bank guidelines in this regard and to consider the “financial condition and creditworthiness” of loan applicants when making lending decisions. The same principle should apply here as well, with the State Bank instructing banks to communicate in writing to their customers the reasons for the rejection of their applications. Banks that violate criteria set by the central bank or that discriminate on social or economic grounds should be sanctioned to ensure that everyone gets a fair deal.

Posted in Dawn, February 20, 2022

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