The Deputy RBI Governor SS Mundra has cautioned the banks not to outsource to the third party its critical function of 'Credit Appraisal' and rather outsource other non-core activities, said at an Assocham event.
We encourage the banks to outsource the non-core activities and banks should be more engaged in core activities but the credit processing is not a non-core activity, said Mundra while inaugurating 'Bankers-Borrowers Business Meet' organized by The Associated Chambers of Commerce and Industry of India (Assocham).
There are issues around delaying of sanctions to borrowers resulting in escalation of project costs, very often as banking supervisors we also observe instances where bankers appear to be too liberal in sanctioning loans or bringing in restructuring or CDR dispensation for the benefit of the borrower, said Dy. Governor, Reserve Bank of India.
The level of stressed assets in the system underscores the need to improve the monitoring of performance of banks as lenders as also the need for the borrowers to adhere to the loan covenants, added Mumdra.
"Pricing of loans does not always follow the corresponding rating. Similarly, the computation of base rate by the banks has not been found to be very scientific and transparent."
Often the smaller borrowers allege bias by banks in favour of corporate entities in matters of lending. An oft heard grievance from SME borrowers is the insistence on collaterals where it is neither mandated nor necessary. Perhaps there is also a need for significant percolation of regulatory intent across the wide network of branches and offices of banks, said Dy. Governor, Reserve Bank of India.
The transparency in disclosures of fees/charges payable by borrowers for processing of loan etc. needs improvement. The regulatory intent of resolving stressed assets through the means of a Joint Lender forum framework, sometimes gets undermined due to differences amongst the bankers. There are instances of banks complaining about non-cooperation by other lenders, taking unilateral action in reaching compromises or restructuring outside the JLF, declaring wilful defaults to stall the concerted operation of JLF.
"Innovations is important but let us not innovate to the extent of securitizing the receivables of a project which is yet to fully come into existence," said Mundra.
He said, a very common occurrence that strains the banker-borrower relationship is recognition of stress in loan accounts. An account can turn non-performing on account of genuine difficulties an unfavorable business environment, certain unforeseen political, legal or judicial development. Projects do suffer from delays due to delay in getting permissions and witness cost and time overruns. It may be difficult for even the most precise of business projections or the most efficient of credit appraisals to foresee these problems. It would be irrational on part of either the supervisor or the banker to cast aspersions on the intent of the borrowers in such cases.
However, it is important in such cases that the bankers as well the borrowers do admit the problem at the earliest and initiate measures to revive the account including infusion of new equity, sanction of new debt, induction of new promoters etc. Restructuring of problem accounts is a perfectly genuine banking tool and must be used if in the bankers' assessment the business is worthy of revival and holds economic value. Any delay in reviving a project showing signs of incipient sickness would only lead to loss of further value which the banking system /economy can ill afford.
The issue is how to deal with imprudent and non-co-operative borrowers, wilful defaulters or for that matter, fraudsters? It is important that the errant borrowers are quickly brought to book and recovery proceedings be completed as early as possible.
A non-performing account of whatever origin and pedigree, is a drag on the banking system and increases the cost of intermediation, which pinches an honest borrower the most. It is important for the system to weed out the unethical elements at the earliest opportunity to ensure the credibility and the efficiency of the credit system in the country, highlighted Mundra.
Several attempts are already underway, one of which is the establishment of a central fraud registry, which will enable quick sharing of information on entities found to be defrauding banks. RBI and IBA together have also taken upon themselves the circulation of caution advices relating to all types of frauds, including those pertaining to loans and advances. Efforts also need to be made to alienate the willful defaulters and fraudsters and debar them from accessing the banking system for further finance. Similarly, there would also be a need to the deviant behavior within the banking community through effective vigilance practices, quick staff accountability measures and timely institution of criminal cases in fraud cases. A message needs to go down loud and clear that intentional wrong-doings will not go un-punished and lax credit monitoring or reckless sanctions will be appropriately dealt with, added Mundra.
The need is for taking strong and timely measures. With giant strides that have been made in IT, the banks should not find it difficult to exercise a stricter oversight regime to identify early sign of impending default. I would also exhort the borrowers (individual or corporate) to understand their basic responsibilities, co-operate with lenders and adhere to a general code of conduct and discipline.
The minimum one can do is to adhere to the loan agreements. Use of judicial channels should not be too prolific and frequent; instead, these should be used to foster better borrower protection rather than to undermine the credit discipline in banks. Any lender-borrower relationship can only survive on mutual trust and co-operation; breach of trust can ultimately become either an offence (under criminal law) or a civil wrong thereby defeating the credit system in India.
