Rajan chides state-run banks for engaging middlemen for loans

With non-performing assets in the financial system rising, Reserve Bank Governor Raghuram Rajan today pulled up state-run banks for "outsourcing" an important task like loan evaluation to middlemen, and asked them to end the practice at the earliest by improving internal processes.
"A problem that has emerged in recent years and recent scandals is the fact that evaluation has been outsourced. Loan evaluation is so central to banking, it is impossible to outsource. We need better project evaluation through improved internal skills, not through intermediaries," he said addressing bankers here.
Rajan, who has declared that containing the high NPAs is one of his top priorities, suggested that the recent case involving the arrest of state-run Syndicate Bank chief S K Jain in a bribe-for-loans scam can be traced to "malfeasance".

"There are also allegations of malfeasance in the Syndicate Bank case, there is a suggestion that there could be malfeasance," said Rajan, who early this month completed one year at the helm of India's central bank.
The governor said on a critical issue like evaluating loan proposals, bankers need to get their act together and be more professional in their approach. "We have to move towards engaged, informed banking and not get internal jobs done by engaging outside intermediaries."
Bad assets rose to 4.2 per cent for the banking system, led by Government lenders, in the April-June quarter, as per the data collated by rating agency Icra. Last fiscal it stood at 3.9 per cent.

He warned them that further forbearance to deal with non- performing assets is not an option and the answer lies in dealing with the problem upfront by raising more capital.
"We have to make sure that we don't give so much forbearance that we really don't know whether the asset is functioning or not...It creates enormous ever-greening and the end result is that bank balance-sheets have no meaning.
"The true answer over time is to raise more capital, to tide over the capital crunch of banks which have been getting depleted over the years," he added.