Takru slams banks for lax loan appraisals

Undue advantage of CDR and Cobrapost expose also figure in public rap

The Union finance ministry has come down heavily on banks for a lax credit appraisal process and taking undue advantage of the corporate debt restructuring (CDR) mechanism.

“It’s a disgrace that banks have allowed cooked–up balance sheets (of borrowers) to get through,” said Rajiv Takru, secretary, financial services, at a  seminar attended by leading bankers.

Public sector banks (PSBs) in particular have seen a sharp rise in non-performing assets (NPA) and debt restructuring in the past two years, amid a slowing economy.

“Routinely we find that the loan is not covered by enough security, which is a basic financial duty,” said Takru, noting banks had been more inclined to give loans to large corporate borrowers as compared to small retail ones.

“Why does it happen that for a Rs 5,000-crore loan, the basic precautions are not taken which are ensured for a Rs 5-lakh loan?” he asked.

He said the gross NPA of PSBs had risen to 3.9 per cent of gross advances as on end-December from 1.9 per cent till a few years earlier. “This is a sorry state of affairs,” he said. He also slammed banks for taking undue advantage of the CDR mechanism, saying they did so to defer NPA classification. If a loan is restructured before it becomes bad, then banks can treat the loan as a standard one if the net present value of the asset is kept intact, though the provisioning requirement is higher for such loans.

“CDR is very fashionable these days. We should remember that CDR is meant for only for cases which are bona fide and where there is scope that the unit could be salvaged. CDR is not for postponing the inevitable,” said Takru.

PSBs’ restructured advances were 5.73 per cent of gross advances as of March 2012, as compared to 1.61 per cent in private sector banks and 0.22 per cent in foreign banks.

Last week, the Reserve Bank of India (RBI)  increased the provisioning requirement for bad loans and restructured advances.

All loans restructured after April 1, 2015, will have to be classified as NPA. Also, from this week, the provisioning requirement for fresh standard restructured advances has been increased to five per cent from 2.75 per cent. For the existing stock of restructured loans, provisioning will be increased to five per cent in a phased manner over three years.

“We don’t expect cowboys here, particularly when you are dealing with someone else’s money,” said Takru in front of a packed house of bankers.

Regarding the recent allegations of online portal Cobrapost, which accused banks and insurance companies, on the bsis of videotape records, of violating anti-money laundering and Know Your Customer norms, Takru said  the degree of irregularities were very high and insurance companies had also featured prominently in the expose.

In this context, he advocated increasing the penalty for banks found to be violating norms, so that it pinched them. “My personal view is it should be Rs 500 crore,” he said. At present, the penalty is Rs 1 crore and the government is in talks with RBI to increase it.