Loan scams: RBI chief Rajan warns banks on outsourcing key internal jobs

Mumbai: As concerns mount over rising bad loans and scams at banks, the Reserve Bank today asked lenders to improve project evaluation skill internally instead of depending on external agencies, and to set up automated monitoring systems.

“We need better project evaluation through improved internal skills, not through intermediaries. A problem that has emerged in recent years and the recent scandals is the fact that the loan evaluation process has been outsourced,” Reserve Bank Governor Raghuram Rajan said addressing anindustry summit here.

[caption id=“attachment_51825” align=“alignleft” width=“380”]  RBI Governor Raghuram Rajan. PTI[/caption]

Underlining the need for a rigorous assessment system, he said the “loan evaluation process is so central to banking that it is impossible to outsource. It has to be brought back in-house and competencies generated. We have to move towards engaged, informed banking and not getting done by engaging outside intermediaries.”

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Banks are the main source of funding for infrastructure projects and that will increase as the economy regains its lost momentum, Rajan said.

He also warned them that further forbearance to deal with non-performing assets (NPAs) or bad loans 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 regulatory requirement is to make sure that banks’ balance sheets continue to be informative,” Rajan said.

“The true answer over time is raise more capital, to tide over the capital crunch of banks which have been getting depleted over the years,” he added.

Asked during an interaction whether restructuring can be provided on project loans, Rajan warned that such a move could have serious implication on banks’ balance sheets and investor perception.

Rajan said: “Ultimately, if the account is stressed it can be restructured. There is nothing that stand in the way of restructuring. But there will be implications on provisions and capital. If we start showing forbearance on that, then it runs the risk of diluting the entire balance sheet.”

According to estimates, recast loans at about Rs 3.5 trillion (Rs 3.5 lakh crore) constitute nearly 6 per cent of the total banking system.

Partly blaming the depressed economic conditions for the rise in bad loans, with the GDP growing at sub-5 per cent levels in the past two years, Rajan said: “Some elements of poor structuring and slowdown in government action also contributed to formation of NPAs. There are also allegations of malfeasance in the Syndicate Bank case.”

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 that stood at 3.9 per cent.

Lauding the good talent pool at the public sector banks, Rajan said, “but we do need to fully benefit from the strengths of this system rooting out the bad apples.”

He said governance reforms in PSBs through better hiring practices for the top jobs and paying public sector bankers at market rates can go a long way in improving the asset quality of state-run banks.

Rajan supported the P J Nayak Committee report on strengthening the board oversight and powers, and making the boards more empowered and accountable. “We have to work on improving the quality and effectiveness of bank boards.

“We cannot under-compensate bank board members and compensate everybody else, and ask bank board members to take an enormous amount of risk. I think we need to look at bank board compensation also.”

He said that giving more autonomy to private banks to take commercial decisions can help contain bad loans. After all PSBs also have private shareholders and they cannot be an extension of the Government alone.

Talking to reporters on the sidelines of the event, SBI Chairperson Arundhati Bhattacharya agreed with Rajan’s comments on internal risk evaluation mechanism, saying that banks alone understand their risk appetite and hence there must be no compromise on evaluation process.

Rajan said PSBs have tremendous potential which should be leveraged on.

He added: “There are also allegations of malfeasance in the Syndicate Bank case, there is a suggestion that there could be malfeasance… The public sector system is a system which has tremendous resources, lots of very good people, but we do need to fully benefit from the strengths of this system rooting out the bad apples in the system.,” he said.

The Syndicate Bank case relates to the arrest of its CMD Sudhir Kumar Jain for allegedly receiving a bribe of Rs 50 lakh to enhance the credit limits of some companies.

PTI