I. WHAT IS CREDIT UNDERWRITING GOVERNANCE?

Underwriting Governance = Rules that decide WHO can sanction, HOW they must appraise, and WHAT checks are mandatory before money leaves bank.

RBI defines it under 4 pillars in its 2022 Guidelines on Governance:

Pillar 1: Structure
Pillar 2: Process
Pillar 3: People
Pillar 4: Oversight

Violation of any pillar makes loan voidable and officer personally liable.

II. PILLAR 1: STRUCTURE - WHO CAN SANCTION

A. Board-Approved Credit Policy - Mandatory u/s 27 BR Act

Every bank must have a Board-approved Credit Policy reviewed annually. It must contain:

• Exposure limits (single borrower 20% of capital, group 25%)
• Delegation of powers - Who can sanction how much
• Minimum Credit Rating
• Prohibited sectors (e.g., RBI prohibits lending for buying gold, margin trading)

Case Law:
1. Syndicate Bank vs Estate Officer (2007) SC
Bank sanctioned loan beyond Delegation of Powers - Branch Manager sanctioned Rs.5 cr while power only Rs.1 cr. SC held loan is still valid vis-a-vis borrower (indoor management), but officer liable for breach and bank can recover from officer. Loan does not become void for borrower.

2. RBI Penalty on 13 Banks - 2020 - Yes Bank / DHFL Case
RBI found banks sanctioned loans without Board Credit Policy covering lending to NBFCs. Penalty Rs.1.5 cr each. Rule: Cannot lend to sector not covered in Credit Policy.

B. Committee Structure - 3 Levels

Level 1: Credit Approval Committee (CAC) / Credit Committee

• For loans above threshold (e.g., > Rs.10 cr in PSU banks)
• Must have at least 3 members: Credit Head, Risk Head, Business Head. Risk Head must have veto.
• Quorum and voting recorded. Dissent must be recorded.

Level 2: Credit Risk Management Committee (CRMC) - Board Level

• Reviews large exposures > Rs.50 cr.
• Independent from business.

Level 3: Board / Management Committee of Board (MCB)

• For loans > Rs.200 cr in large banks.

Case Law:
3. CBI vs Rana Kapoor (Yes Bank Case) - Special Court Mumbai 2021
Key charge: Rana Kapoor as MD overrode Credit Committee. Credit Committee rejected DHFL loan, but MD approved under Management Committee bypassing Risk veto. Court held: Governance requires Risk Head veto cannot be bypassed. If MD overrides, it is criminal conspiracy u/s 120B + Section 409 IPC.

4. ICICI Bank vs Chanda Kochhar - Videocon Case - CBI Charge Sheet 2023
Allegation: Credit Committee of ICICI approved Rs.300 cr to Videocon while Chanda Kochhar's husband had quid pro quo. CBI argued Credit Committee was not properly constituted - Conflict of interest not disclosed, independent members absent. ICICI's Board Credit Policy required disclosure of conflict. Violation = fraud.

Governance Rule from this case: Underwriting governance requires disclosure of Related Party and recusal.

C. Separation of Duties - Sourcing vs Underwriting

RBI 2022 circular: Business team that sources loan (Relationship Manager) cannot be part of Credit Approval. Must have independent Credit Appraisal Team.

Case Law:
5. Central Vigilance Commission vs PNB - Nirav Modi Case - 2018
PNB's Brady House branch: Same officer who issued LOUs was also authorizer in SWIFT. No separation. CVC guidelines say: Maker-Checker must be different, and Credit Underwriting must be separate from Trade Finance. Failure = fraud.

III. PILLAR 2: PROCESS - HOW TO UNDERWRITE

RBI mandates 7 mandatory steps, called 7 Cs of Underwriting Governance:

Step 1: KYC & Due Diligence - Section 2(f) PMLA

Must verify borrower, beneficial owner (if company, ultimate natural person holding >10%), promoter background, CIBIL, CRILC, wilful defaulter list, fraud registry.

Case Law:
6. RBI vs Rajesh Agarwal (2023) SC
Held: If bank fails to check CRILC before sanctioning, fraud classification later fails. Due diligence is pre-sanction governance duty.

Step 2: Credit Appraisal - Technical, Financial, Legal

• Financial Appraisal: DSCR, ICR, Debt-Equity, CMA data analysis, cash flow projection for 3-5 years. RBI mandates use of audited financials, not provisional.
• Technical Appraisal: For project loans, LIE report (Lender's Independent Engineer) mandatory for loans > Rs.50 cr.
• Legal Appraisal: Title search for 30 years for mortgage, search report from empanelled advocate.

Case Law:
7. Bank of India vs Alpic Finance (2008) SC
Bank sanctioned loan without legal appraisal of title. Title found defective. Bank lost security. SC held bank cannot claim negligence of lawyer only - Credit Committee failed to ensure legal appraisal governance.

8. Canara Bank vs N.G. Subbaraya (2020) Karnataka HC
Financial appraisal based on inflated stock - No verification. Bank held negligent, lost secured creditor status.

Step 3: Risk Rating

Every loan must have internal risk rating (e.g., CRISIL equivalent). Rating model must be Board-approved and validated annually. Cannot sanction below minimum rating (e.g., many banks require BBB minimum).

Case Law:
9. Punjab National Bank vs M/s Kadoor Steels - DRT 2021
Bank sanctioned loan to borrower with Rating D (default grade) violating its own Credit Policy which required minimum BBB. DRT held: Violation of internal policy does not make borrower not liable, but vigilance action against officer mandatory. Bank cannot recover risk premium.

Step 4: Exposure Check - CRILC, CIBIL, Large Exposure Framework

Before sanction, must check CRILC for aggregate exposure of borrower across all banks. Must also check group exposure.

Step 5: Documentation & Pre-Disbursement Conditions

Sanction letter must have Conditions Precedent (CPs): Creation of security, submission of insurance, equity infusion. Disbursement without CP compliance = governance violation.

Case Law:
10. State Bank of India vs M/s Econ Antri Ltd. (2014) Bombay HC
SBI disbursed term loan before mortgage creation, relying on undertaking. Borrower diverted funds. Court held: Disbursement without CP compliance is negligence; bank cannot invoke personal guarantee for that portion because guarantee was conditional on security creation.

Step 6: Post-Sanction Review / Hindsight Review

RBI requires Risk Team to do post-sanction review within 3 months to check if underwriting was proper.

Step 7: Annual Review

Every facility must be reviewed within 12 months. If not reviewed, facility automatically downgrades and cannot be renewed.

Case Law:
11. Allahabad Bank vs M/s Shivam Steels - NCLAT 2022
Bank failed to review CC limit for 2 years, but continued allowing operations. NCLAT held: If no annual review, bank deemed to have waived right to allege that account is overdrawn.

IV. PILLAR 3: PEOPLE - COMPETENCY & CONFLICT

Rule 1: Qualified Underwriters
Underwriter must be certified - RBI mandates certification from IIBF for credit officers handling > Rs.10 cr.

Rule 2: No Incentive Linked to Disbursement
Business team incentive cannot be linked only to sanction amount. Must be linked to asset quality. Many private banks were penalized for this.

Rule 3: Cooling Period
Officer who sanctioned loan cannot be part of recovery of same loan for 2 years.

Case Law:
12. CBI vs Wadhawans (DHFL Case) - 2022
Banks' credit officers had direct incentive - commission on every loan sanctioned to DHFL. Court held this violates governance - incentive structure that rewards disbursement over quality is abetment to fraud.

V. PILLAR 4: OVERSIGHT - AUDIT & WHISTLEBLOWER

• Concurrent Auditor must report underwriting violations monthly.
• Internal Audit must audit 100% of loans > Rs.10 cr.
• Whistleblower policy - Employee can report override of Credit Committee.

Case Law:
13. RBI Circular on Divergence 2017 - Case of Axis Bank, ICICI
RBI found divergence in NPA classification because underwriting governance weak. Banks had not classified NPA though borrower defaulted. RBI imposed penalty and forced disclosure in annual report. Led to stock crash.

14. SEBI vs Yes Bank - 2021
Yes Bank failed to disclose underwriting governance failure to stock exchange. SEBI held: Failure of Credit Committee governance is material information under LODR - Must be disclosed.

VI. 5 GOVERNANCE VIOLATIONS THAT LEAD TO CRIMINAL LIABILITY

1. Bypass of Credit Committee: Sanction without committee = Section 409 IPC + Section 13 Prevention of Corruption Act.
2. Evergreening: Sanction new loan to repay old loan to hide NPA - RBI considers fraud.
3. Split Sanctioning: Split Rs.10 cr loan into 5 loans of Rs.2 cr to avoid CAC - Violation of delegation.
4. Linkage: Sanction loan on condition borrower invests in bank's subsidiary / buys insurance - Prohibited under RBI.
5. Conflict of Interest: Sanction to related party without disclosure - ICICI Videocon precedent.

VII. NEW GOVERNANCE REFORMS 2024-25

1. Digital Lending Guidelines 2022-25: Algorithmic underwriting must be explainable. Black-box AI model without Board approval invalid. Bank must have human override.
2. Expected Credit Loss (ECL) Framework from 01.04.2025: Banks must provision based on forward-looking risk, not incurred loss. Underwriting must estimate lifetime ECL.
3. Independent Risk Director: RBI now mandates PSU banks to have Chief Risk Officer with independent reporting to Board Risk Committee, not to CEO.
4. Rotation of Credit Officers: Officer cannot be in same credit vertical > 3 years.

Practical Toolkit:

If you are auditing a bank's underwriting file, ask for this Governance File:

• Board Credit Policy relevant year
• Credit Committee Minutes with voting + dissent
• Risk Rating Sheet + Model validation
• CRILC enquiry screenshot before sanction
• Legal Search Report + Technical Report
• CP Compliance Certificate before disbursement
• Post-sanction Review Note