Reserve Bank Deputy Governor SS Mundra has come down heavily on a section of promoters for duping the banking system and diverting funds. He also lambasted bankers for not exercising due caution while conducting due diligence on the projects they have financed.
“Not all promoters/borrowers have had a clear conscience and some of them were out to dupe the system by using foul means. They are wilful defaulters in banks’ books as they have been unwilling to honour their payment obligations even while having a capacity to do so,” Mundra said. “Some of the promoters have diverted borrowed funds for purposes other than for which the finance was availed. There are also occasions where some of the borrowers have siphoned off funds for personal gains and not created any productive asset.”
According to Mundra, a section of the promoters have also disposed off movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the lender. “The consequent defaults, in such cases are intentional, deliberate and calculated and hence willful. It is this set of promoters that need to be singled out and quickly brought to justice,” Mundra said at the Edelweiss Credit Conclave.
It is not corporates alone that caused pain in the system. In several instances, the bankers have also not exercised due caution while conducting due diligence on the projects that they have financed, Mundra said. “Some of the common shortcomings that the banks exhibited include: governance deficit, poor credit appraisal particularly in infra financing such as highways where contracts were ‘gold plated’, power which suffered from faulty FSAs, absence of pass through arrangements, lack of provision for termination payments etc, weak risk management, chasing quick growth and pretend and extend,” he said.
The mistakes committed by the banks and the corporates, whether incidental or intentional, have resulted in a massive pile up of non-performing assets in the banking system. “While the banks needed to guard against growing credit concentration risks especially in sectors which had witnessed excessively high growth, the corporates should have had the foresight of analysing the emerging market dynamics,” he said.
He said there was a general reluctance from the banking community to admit the level of stress in their books. It was built on the premise that NPAs are taboo and no one would be willing to lend to such accounts. “Though, this perception has some real life truth, my question is should we not administer drug to the sick? Sometimes, there are overblown fears of unknown. If we don’t address the stressed accounts, what are our alternatives? Company position would deteriorate further, hit banks’ books and would still invite further scrutinies. Having said that, it is important to quickly decipher whether the disease is curable or terminal and also if curable, medicinal or surgical,” he said.
As any surgery is preceded by certain medication or other pre-operative procedure, here also, the RBI did prescribe them. It started with creation of the CRILC database which enabled compilation of information on level of indebtedness of various groups to the financial system. This was followed
by issuance of Guidelines on “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy by RBI, which were aimed at improving the system’s ability to deal with corporate and financial institution distress.
Detailed Guidelines on formation of Joint Lenders’ Forum (JLF), Corrective Action Plan (CAP), ‘Refinancing of Project Loans’, ‘Sale of NPAs by Banks’ and other regulatory measures were also issued to banks for enabling prompt steps for early identification of problem cases, timely restructuring of accounts considered to be viable and recovery or sale of unviable accounts. The 5/25 scheme and the Strategic Debt Restructuring scheme were also introduced with a view to enable reduction in stress levels and early resolution.
After the pre-operative procedures, the RBI undertook a surgical procedure in the form of asset quality review at banks. “The exercise was aimed at tracing the sources of pain and pressure points so that remedial procedure could be administered,” he said.
‘Stressed assets on the rise’
Mumbai: RBI Deputy Governor SS Mundra said the stressed assets (gross NPAs, restructured standard assets and written off accounts) for the banking system , which stood at 9.8 per cent as at the end of March 2012, moved up sharply to 14.5 per cent at the end of December 2015. During the same period, the stressed assets for the PSBs spiked from 11.0 per cent to 17.7 per cent. ENS
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