Strengthen inspection of units financed, FinMin tells banks
AUG. 11:
With public sector banks showing a marked increase in bad loans, the Finance Ministry has asked these banks to diligently conduct quarterly inspection of units/enterprises jointly financed by them.
This instruction is aimed at ensuring that the banks take corrective action to prevent slippages (deterioration in asset/loan quality) should they find anything amiss during the inspection.
The inspection conducted by banks, among others, entails audit of stocks/inventory and receivables; verification of stocks and debtors; and verification of collateral.
Banks undertake inspection to ensure that the money they lent is being used only for the intended (productive) purpose and not diverted to unrelated activities/businesses, said a senior public sector bank official.
The utility of the inspection exercise also lies in the fact that it can pinpoint improper credit appraisal and failure to exercise proper post-disbursement supervision.
PERFUNCTORY INSPECTION
As the situation obtains now, in the case of consortium lending, banks conduct quarterly inspection of units by rotation. Often, this inspection is conducted in a perfunctory manner, the banker said.
What usually happens is that inspectors of ‘B’ bank presume that their counterparts from ‘A’ bank would have done a thorough job in the previous quarter or the ones that follow in the next quarter will do a good job. So, complacency sets in and the inspection exercise gets diluted.
A consortium loan (generally, a big-ticket loan) is extended by two or more banks jointly to a borrower. This helps banks spread the risks and keep the exposure within the permissible limits.
The deterioration in the loan/asset quality is underscored by the fact that public sector banks’ gross non-performing assets to gross advances ratio rose to 3.8 per cent as on March-end 2013 (from 3.2 per cent as on March-end 2012).
Further, the restructured standard asset to gross advances ratio of PSBs jumped to 7.1 per cent (5.7 per cent).
For all banks, the average gross NPAs to gross advances ratio rose to 3.4 per cent as on March-end 2013 (from 2.9 per cent as on March-end 2012). Further, the restructured standard asset to gross advances ratio rose to 5.7 per cent (4.7 per cent).
RISK AVERSION
According to the Reserve Bank of India’s latest macroeconomic and monetary developments review, deterioration in both asset quality and in macroeconomic conditions has resulted in risk aversion in the banking sector.
Macro stress test of sectoral credit risk revealed that, among the selected seven sectors, construction and agriculture are expected to register the highest NPA ratios of 4.7-4.8 per cent by March 2014, followed by the iron and steel sector, the RBI said in its latest financial stability report.
The adverse macroeconomic shocks seem to be having maximum impact on iron and steel and construction followed by engineering.
http://www.thehindubusinessline.com/industry-and-economy/banking/strengthen-inspection-of-units-financed-finmin-tells-banks/article5012786.ece
Finance ministry asks banks to take action against failed corporates
MUMBAI: Management of failed companies looking at debt restructuring may have to prepare themselves to take back seat and allow professional management to take charge. Rajiv Takru, secretary, financial services, today asked banks to take firm action against management which diverted funds or have taken wrong business decisions.
Speaking at a seminar organised by Ficci and IBA, Takru indicated that corporates who have failed due to wrong decisions 'have no moral right to continue making those mistakes again and again. The expection on your part that banks will take hit for the money advanced to you and that you don't have to take any hit is unrealistic.'
In this context he said that wilful defaulters 'will have to prepared to take a backseat and allow professional to take charge.'
Comment from finance ministry officials comes at a time when stress loans have risen sharply over the last two years as more and more corporates approach bank to restructure their debt. The share of bad loans to total advances stood at 3.4% in fiscal year 2013 and rating company Standard & Poor's expects it to touch 4.4% this year. In absolute terms, bad loans rose from Rs 1.17 lakh crore in fiscal year ending 2012 and touched Rs 1.64 lakh crore in 2013.
During the seminar, Takru also said that it has come to their notice that 'there are certain people who see distress condition in the economy as an opportunity.' He said that although borrowers may have suffered due to global recession, he added that 'we are seeing more and more people taking advantage of the distress as they negotiate with banks for better rates, seek better discounts and divert funds.' In this context, he said that banks have been too tolerant to such people and urged banks to improve their monitoring. He said that bankers will have to understand that it is public money and that corporate will have repay these loans.
Meanwhile he also urged banks to open branches and install more ATM in rural India in order to achieve inclusive growth. In the same context he said that industries will also need to give boost backward area in terms of starting industries activities there. 'Industry also needs to understand its responsibility and move there,' he said.
Speaking at a seminar organised by Ficci and IBA, Takru indicated that corporates who have failed due to wrong decisions 'have no moral right to continue making those mistakes again and again. The expection on your part that banks will take hit for the money advanced to you and that you don't have to take any hit is unrealistic.'
In this context he said that wilful defaulters 'will have to prepared to take a backseat and allow professional to take charge.'
Comment from finance ministry officials comes at a time when stress loans have risen sharply over the last two years as more and more corporates approach bank to restructure their debt. The share of bad loans to total advances stood at 3.4% in fiscal year 2013 and rating company Standard & Poor's expects it to touch 4.4% this year. In absolute terms, bad loans rose from Rs 1.17 lakh crore in fiscal year ending 2012 and touched Rs 1.64 lakh crore in 2013.
During the seminar, Takru also said that it has come to their notice that 'there are certain people who see distress condition in the economy as an opportunity.' He said that although borrowers may have suffered due to global recession, he added that 'we are seeing more and more people taking advantage of the distress as they negotiate with banks for better rates, seek better discounts and divert funds.' In this context, he said that banks have been too tolerant to such people and urged banks to improve their monitoring. He said that bankers will have to understand that it is public money and that corporate will have repay these loans.
Meanwhile he also urged banks to open branches and install more ATM in rural India in order to achieve inclusive growth. In the same context he said that industries will also need to give boost backward area in terms of starting industries activities there. 'Industry also needs to understand its responsibility and move there,' he said.
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