Norms on Politically Exposed Persons in focus as MPs say kin denied loans

New Delhi : Some parliamentarians have expressed concern about banks and other financial institutions denying loans to their relatives, prompting the standing committee of finance take up the issue.

Some parliamentarians have expressed concern about banks and other financial institutions denying loans to their relatives, prompting the standing committee of finance take up the issue.

While some of those affected have cited international norms on Politically Exposed Persons or PEPs that have been adopted by the Reserve Bank of India, as the reason for this, people in the banking business say that banks and financial institutions may be denying loans to such people purely out of the fear that they may use their political influence to avoid repaying the money.

BJD MP Amar Patnaik, a member of the Parliament’s finance standing committee, said that “A number of MPs flagged difficulties in accessing bank credit for their family members when they try to buy a house or a car. It is a serious problem.”

Last year, BJP MP GVL Narsimha Rao said that banks often deny credit to political leaders and their family members. Minister of State for finance Bhagwat Kishanrao Karad added that even police personnel face similar problems . Finance minister Nirmala Sitharaman had to intervene and clarify that the government doesn’t have any policyof discriminating against political leaders and police personnel in terms of providing them access to bank loans.

The lawmakers believe the issue is with the PEP norms prescribed by the Financial Action Task Force, a UN body tasked with preventing money laundering.

A BJP lawmaker said that the issue had been taken up at several meetings. “While there are no FATF-prescribed KYC (know your customer) requirements for domestic PEPs, financial institutions often deny loans citing these.”

According to a Reserve Bank of India circular of 2009: “Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc”. The circular laid down a list of dos and don’ts for banks in dealing with PEPs: “Banks should gather sufficient information on any person/customer of this category intending to establish a relationship and check all the information available on the person in the public domain. Banks should verify the identify of the person and seek information about the sources of funds before accepting the PEP as a customer. The decision to open an account for PEP should be taken at a senior level which should be clearly spelt out in Customer Acceptance policy. Banks should also subject such accounts to enhanced monitoring on an ongoing basis. The above norms may also be applied to the accounts of the family members or close relatives of PEPs”.

“There is a genuine concern among elected representatives that their family members are unduly denied access to credit or they are charged a higher rate of interest,” said a Rajya Sabha MP.

RBI and perhaps the finance ministry might issue some clarifications in the wake of the increasing complaints.

“We expect the RBI to step in,” said a member of the finance panel who asked not to be named.

A banker who asked not to be named said banks and financial institutions do sometimes refuse loans to people with political connections out of fear that these people may then apply political pressure to not pay back the money. This person admitted that this is not “legal” but that it is similar to another practice banks and financial institutions sometimes resort to — “redlining”, where people from a certain neighbourhood are sometimes refused loans.

The Reserve Bank of India, in a communication, drew a distinction between foreign PEP and domestic political leaders. “FATF first issued mandatory requirements covering foreign PEPs, their family members and close associates in June 2003, following which RBI introduced the additional diligence measures for foreign PEPs in its 2004 Guidelines on KYC. In February 2012, the FATF expanded the mandatory requirements to domestic PEPs and PEPs of international organisations, in line with Article 52 of the United Nations Convention against Corruption (UNCAC). However, RBI did not expand the PEP related instructions to domestic PEPs,” it said.