Taking cognizance of a letter from the finance ministry, which raised concerns that banks were outsourcing the due diligence process before sanctioning a loan, the Indian Banks? Association (IBA) proposes to take up the matter at its managing committee meeting later this week, sources told FE.
?The proposal could come up for review at the next meeting, wherein bankers would present their views. We would then reply to the department of financial services (DFS),? said a source aware of the development.
Commenting on the due diligence of loans by an outside party, State Bank of India (SBI) chairman Arundhati Bhattacharya had said recently that her bank was conducting the process in-house. ?Only if the due diligence was done by the banks themselves would a proper appraisal be possible. You won’t be able to take the right decision and understand your risk appetite,? Bhattacharya had said.
Other bankers confirmed they were already conducting the due diligence process themselves. ?We have individual credit appraisal even when it is consortium lending. So, this suggestion would be an extension of that,? said Arun Tiwari, chairman and managing director, Union Bank.
A public sector bank chairman who retired recently also said that though intermediaries like SBI Capital Markets do credit appraisals for consortium loans, banks do not depend on their view and carry out their individual assessments too. The source said the finance ministry had been counselling banks rather than issuing a fiat when it said the sanctioning of a loan above R500 crore should rest with banks like SBI, PNB, IDBI Bank, ICICI Bank, Bank of Baroda and Canara Bank.
At present, a company seeking loan mostly approaches a specialised corporate branch of the bank. The branch has a team of executives who examine the books of the company, looking into its financial performance over a period of time and sends a detailed report to the respective general manager at the head office of the lender. If the general manager is satisfied with the review, he gives an in-principle approval and sends the file to a credit committee, which is constituted by other general managers and representatives from the risk management team only after which a loan is sanctioned. If the loan is more than R250-300 crore, an executive director of the bank is mandated to be on the credit committee. However, the quantum varies according to the size of the bank. A former SBI executive said it is mostly the smaller banks who do not have capability to conduct their own credit appraisals.
This initiative by the ministry that IBA proposes to discuss is targeted at making banks more responsible in sanctioning funds to corporates and taking adequate measures to assess the loan proposal. The ministry had earlier this month expressed concern over the due diligence process being followed by banks prior to sanctioning a loan. It had questioned the practice of outsourcing the process of credit appraisal to an intermediary who appraises on the bank’s behalf.
?Even these large banks have huge NPAs even after credit appraisals were done by themselves. So, even they have committed errors in the past,? said a senior executive of a public sector bank.
Public sector banks have been at the forefront of the NPA situation as not only are their gross and net NPA ratios higher than industry averages, they have also accounted for about 92% of the restructured standard advances, RBI said in its annual report.
An Icra report has pointed out that the fresh NPA generation rate of PSBs increased to 3.5-3.6% in 2013-14 against 3.1% in 2012-13, leading to an increase in the gross NPA ratio to 4.4% as on March from 3.6% the previous year.