FM Asks Banks To Tighten Sanctioning Norms

Banks advised to tighten letters of credit sanction norms-ET 28th October 2013

(Read my views below)

The finance ministry wants state-owned banks to follow more stringent norms while issuing bank guarantees or letters of credit to borrowers, concerned that such type of funding results in double financing, which often leads to financial indiscipline among borrowers. 

A finance ministry official told ET that the government nominees on the boards of state-run banks have taken up the issue with bank officials, asking them to tighten the rules. 

In June 2004, the Reserve Bank of India (RBI) had removed all limits on unsecured exposure of banks, which includes bank guarantees, and given bank boards freedom to fix their own policies on such exposures. 

The finance ministry is keen that banks should restrict themselves from extending these facilities to parties who do enjoy working capital facilities with them. 

"We had apprised the Indian Banking Association about these concerns earlier in the year. Banks individually are also expected to address the issue," he said, requesting anonymity. 

Under the bank guarantee, a financial institution agrees to pay on behalf of its borrowers if they (borrower) fail to deliver in a contract. 

A letter of credit enables buyers to take delivery of goods without upfront payment and sellers to receive immediate payment soon after goods are shipped. 

The finance ministry is concerned that banks relax the sanctioning norms in order to grow business, but its adverse fallout is increase in non-performing loans."It was observed that some banks were extending bank guarantees and letter of credit outside working capital limits, which also lead to breaching of company exposure and group exposure norms," the finance ministry official said. 

As per RBI guidelines, the exposure ceiling limit is 15% of capital funds in case of a single borrower and 40% of capital funds in the case of a borrower group. In case of infrastructure projects, the limit increases to 20% in single borrower and 50% to a group. 

The government wants banks to follow a careful risk evaluation methodology and ensure separate margin money requirement from borrowers coupled with security cover before extending bank guarantees. 

An executive director of a state bank said that these guidelines are advisory in nature and it will be for the bank boards to take a final decision. "They are concerned about rising bad loans. After some heavyweight infrastructure projects were stuck, some banks got exposed to payment obligations under performance bank guarantees (PBG)," he said. 

State-run banks had gross NPAs of Rs 1.92 lakh crore or 3.99% of advances at the end of June. The top 30 such accounts in state-run banks constitute 34.83% of gross NPAs at around Rs 63,671 crore.

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-advised-to-tighten-letters-of-credit-sanction-norms/articleshow/24789945.cms

My Opinion is as follows 

I appreciate finance Minister for advising banks for tightening of norms for sanctioning of Letter of Guarantee and Letter of Credit. It is true that banks are very much liberal and negligent in sanction of such Non Fund Based Limits to borrowers. I would like to further add here that Finance Minister should advise banks to tighten the norms for sanctioning of other loans too. Risk involved in fund based or non fund based advances are more or less the same. 

FM has however to understand the basic reasons behind sanctioning of LC or LG or any credit facility at liberal terms or with negligence. It is not always the case that rules are liberal or the sanctioning officers are unaware of rules and risk involved in sanction of LC or LG or any loan.  It is also the case of liberal and corrupt attitude of sanctioning attitude. There may be various reasons behind liberal attitude of sanctioning authority.

It is found that when a minister or a powerful official makes a phone call to senior officer of a bank recommending verbally sanctioning of credit facility to a business man who is close relative or friend or indirectly associated with the recommending officer or minister or politician. As soon as such phone call comes , officials of bank become double faster in sanction of  loan to such recommended business house so that the bank officer may win the good will of powerful officer and minister which in turn may be used for personal gain, favourable transfer and out of turn promotions . 

Further recommending officer do not recommend such cases in writing and hence no proof is left behind which may cause trouble to him when the loan given to recommended person goes bad in future. In all such cases instruction percolates down the level on phone and ultimately the junior officer who recommend under pressure of higher bosses in fear of repercussion in greed of some gain is punished and the actual guilty is always exonerated.Same culture of phonic instruction to juniors prevails in lower controlling offices and branches.

Rather if investigation is carried out to know the real reasons behind any high value bad loan in any bank, it will be proved that in most of the bad assets , sanctioning authority was in nexus with bad borrowers due to some self interest or was under pressure of higher bosses , politicians or ministers.There are certain areas where bank officer has to sanction loans when he or she is threatened of dire consequences by local leaders and when higher bosses advises such officers to manage tactfully . Administrative officers also feal local leaders and goonda elements and this results in reckless sanction of loans and which finally results in accumulation of bad assets.

As such need of the hour is to strengthen the sanction process at all level and weed out officers, ministers and politicians who build pressure on bankers for sanctioning of loan. Need of the hour is to provide full security to bankers who are entrusted with sanctioned power and who deals in financial matters.

Government has to stop imposing targets on bankers and assess the performance based on actual work done, not on the basis of whether a person has achieved the imposed target or not. 

Bank management should also ensure posting of knowledgeable person at key posts and try to learn to respect officers who are really talent and loyal to banks and immediately stop giving weight to those who are ideally Yesman and number one flatterer. 

Bank management has to prove their intention by their action and then only good culture will be inculcated down the line and banks will be able to improve its intrinsic value and improve its health in real sense.