RBI chief calls for cleaning up of banking system

MUMBAI (Reuters) - India's state banks need to improve monitoring of loans and root out "bad apples" and "bad practices," Reserve Bank of India Governor Raghuram Rajan said on Monday, as the sector continues to struggle with bad assets.

In a speech at a banking conference in Mumbai, Rajan also called on public sector banks to stop outsourcing assessments of creditworthiness, and said the lenders needed to better monitor their loan evaluation processes.

"We need better evaluation using in-house skills, not intermediaries. I think one of the problems that has emerged in recent years and in recent scandals is the fact that evaluation has been outsourced," he told the gathered bankers.

"Evaluation is so central to banking, it's impossible to outsource it. It has to be brought back in-house and competency generated. We have to move towards engaged, informed banking and not banking driven by outside intermediaries and middle men."

Rajan added public sector banks had "lots of good people" but said the lenders needed to root out "bad apples, bad practices, and weak capabilities."

The RBI supervises state-run banks in India, although the finance ministry controls the lenders through its majority stakes.

An economic slowdown in India has hit balance sheets in the sector, with stressed loans - those categorised as bad and restructured - amounting to about 10 percent of all loans.

India's police last month launched a corruption investigation at state-controlled Syndicate Bank Ltd, further raising concerns about weak oversight, graft and politically-directed lending in the sector.

State Bank of India (SBI), however, said the country's largest lender has never used a third-party to assess the profile of a corporate borrower.

"SBI has never used a loan appraisal by any intermediary. We have always used our in-house appraisal system," the bank's Chairwoman Arundhati Bhattacharya told reporters on the sidelines of the conference.

(Reporting By Neha Dasgupta and Devidutta Tripathy, Writing by Sumeet Chatterjee; Editing by Rafael Nam and Michael Urquhart)