1. What Does Adequate Assessment Mean?

RBI / IBA Standard:

• Capacity: Cash flows, DSCR, FOIR, CIBIL, vintage
• Collateral: Independent valuation, legal audit, LTV, margin
• Character: Past defaults, willful defaulter check, fraud check
• Concentration: Single borrower / group / sector / geography exposure limits
• Conditions: End-use, project viability, TEV study > Rs 10 cr
• For Insurance Underwriting: Duty to read policy, assess cargo, credit risk
• For Securities Underwriting: Due diligence that does not comply with reasonable underwriting practices = liability under Sec 11 Securities Act

If officer fails to do this, business judgment rule will NOT protect.

2. Indian Disciplinary Case Law - Credit Underwriting

State Bank of India vs Employee - 1999 - Supreme Court Reports [1999] 2 S.C.R.

Facts: Bank manager charge-sheeted for sanctioning loans without adequate security and without prior approval / ratification from superior authorities and contrary to departmental instructions.

Inquiry Officer found respondent guilty of gross negligence and awarded dismissal without notice. Challenge dismissed by Supreme Court.

Principle: Sanctioning loan without adequate security = gross negligence, not mere business judgment error. Dismissal upheld. This is still quoted in all bank charge sheets.

Vimal Chandra Grover v Bank of India - Supreme Court - 26 April 2000

Pledged shares management. Bank failed in duty by not acting promptly and diligently in selling appellant's pledged shares as requested, thereby causing financial harm. Court awarded Rs 5,09,037.47 with interest, holding bank accountable for negligent handling of security.

Canara Bank v Leatheroid Plastics Pvt. Ltd. (2020 INSC 402) - 2020 3 SCC 455

Bank undertook to effect insurance of hypothecated assets. Bank insured only part, left shortfall. Goods destroyed by fire. Supreme Court upheld NCDRC decision holding bank responsible for deficiency in service. Bank has duty to ensure adequate coverage of entire set of hypothecated assets when it undertakes insurance.

This is classic underwriting exposure failure - bank as bailee of security failed to assess insurance exposure adequately.

Digital Arrest Scams - Supreme Court Suo Motu - In Re: Victims of Digital Arrest Related to Forged Documents - Oct 2024 - CJI Surya Kant Bench

Calling siphoning of monies as "absolute robbery and dacoity", SC raised serious concerns over possible collusion or negligence of bank officials in fraudulent transactions. Proposed banks be made liable to compensate victims at least to extent of money lost, where financial institutions failed to exercise adequate due diligence to prevent fraudulent transactions. Must incorporate enforceable provisions in RBI framework.

Applies to underwriting of mule accounts - failure to assess KYC / exposure of customer opening account.

3. US - Business Judgment Rule Does NOT Protect Inadequate Underwriting

Federal Deposit Insurance Corporation v. Rippy / FDIC v. Willetts - 799 F.3d 301 (4th Cir. 2015) - Also known as FDIC v. Willetts

Most cited case on failure to assess underwriting exposure.

Facts: Cooperative Bank, North Carolina community bank failed. FDIC as Receiver sued officers and directors for negligence, gross negligence, breach of fiduciary duty for approval of 86 lot loans and 9 commercial loans.

District Court granted summary judgment for directors under business judgment rule.

Fourth Circuit Reversed:

• Business judgment rule is presumption that directors act in good faith and with rational business purpose. There is protection from bad decisions, not from failure to follow procedures.
• Officers failed to comply with recognized banking practices in obtaining loan approvals. When officers failed to "avail themselves of all material and reasonably available information" they "did not act on an informed basis" and thus were not entitled to protection.
• Expert report showed officers failed to obtain appraisals, verify borrower equity, check concentration limits.
• Business judgment rule rebutted when bank officers failed to follow procedures.

Principle Now Used Globally: Underwriting exposure assessment is not discretionary. If you don't obtain appraisal, LTV, CIBIL, TEV, you lose business judgment protection.

4. Securities Underwriting - Failure to Assess Issuer Exposure

Bank of America Corp. v SR International Business Insurance Co. - 2007 WL 4480057 - WorldCom Bond Underwriting

In 2000-2001, insured bank served as underwriter of bond offerings for WorldCom. Plaintiffs alleged bank violated Section 11 of Securities Act of 1933 - false registration statement. Bank sought insurance coverage for settlement. North Carolina Superior Court held amounts paid to settle Section 11 claims constitute insurable loss.

Lesson: Underwriter who fails to assess issuer's declining revenue, materiality of information, faces Section 11 liability. Cannot claim public interest defense.

Underwriter Due Diligence - Settlement - Mondaq Report

As part of settlement, underwriter admitted it engaged in conduct contrary to public interest in that it "conducted due diligence in a manner that did not comply with reasonable underwriting practices" - analyzing FMF's declining subprime revenue to properly assess materiality.

Oneida Savings Bank v Uni-Ter Underwriting Management Corp. - N.D.N.Y. - 5:13-CV-746

Plaintiffs Oneida Savings Bank alleged defendants made false representations which induced them to invest $2,200,000 in convertible debentures in now-defunct insurance company Lewis & Clark. Claims under federal securities laws and state common law for fraudulent inducement. Underwriting manager failed to assess risk retention group's limitation to provide coverage.

5. Insurance Underwriting - Failure to Read Policy

ABN Amro Bank NV v Royal & Sun Alliance Insurance and others [2021] EWHC 442 (Comm) & [2021] EWCA Civ 1789

Marine cargo underwriters subscribed to risk, baulked at notion they had agreed to provide stand-alone credit risk / financial default cover - blamed broker Edge for failing to make extent of clause known. Some underwriters said they had not read policy.

Court found in favour of Bank, holding language of bespoke Transaction Premium Clause clearly provided cover in respect of all risks of financial default, regardless of physical loss or damage.

Principle: Insurer's fact that insurer had not properly read policy they were underwriting does not protect. Duty to assess exposure by reading wording. Failure = pay claim.

Similar: Branch Manager, SBI v Rashmi Shrivastava 2026 SCC OnLine Chh 12969 - Chhattisgarh HC relying on Canara Bank v United India Insurance Co Ltd (2020) 3 SCC 455 - bank voluntarily undertakes role as master policy holder, has independent duty to assess underwriting - cannot shift blame to insurer.

6. UK - Risk Assessment in Investment Advice

Worthing and another v Lloyds Bank plc [2015] EWHC 2836 (QB)

Claim related to failure to correct initial advice to invest and subsequent advice to retain investment. Court held risk assessment had been robust method of probing and assessing attitude to risk and had been properly applied. Judge rejected claim that defendant had not properly assessed claimants' attitude to risk at outset.

Contrast case shows what adequate assessment looks like - documented risk profiling, evidence of full assessment, periodic review.

7. How RBI / Court Tests Adequate Assessment

Checklist from FDIC v Rippy + SBI disciplinary:

1. Did officer obtain independent valuation, legal title search before sanction?
2. Did officer verify CIBIL, CRILC, willful defaulter list?
3. Did officer check single borrower limit, group exposure, sector cap?
4. Did officer obtain TEV for >10cr, LIE certification for project finance per 2025 Directions?
5. Did officer avail all material and reasonably available information - or rush to meet target?
6. If decline in subprime revenue or geopolitical risk existed - did underwriter assess materiality?

If answer No to any, underwriting failure established, and business judgment rule not available, gross negligence proved, personal liability of officer + bank vicariously liable to customer under Consumer Protection Act 2(1)(g) - deficiency in service.