Banks told to conduct proper inspection of units

The Ministry of Finance has instructed Banks to conduct proper inspection of units financed by them in order to avoid NPA status.

It is nobody’s secrete the manner in which banks conduct inspection of units financed by them.  Some times the financed parties itself are required to fill up the inspection report and submit in the branches.  The branches however religiously debit the party’s account with inspection charges.  Some times such aimless and mindless  debiting of accounts itself is subject matter of intense litigation.

With NPA levels of public sector banks shooting up through the sky the mandarins in the Ministry have suddenly become acutely aware of the small administrative and procedural lapses done by bank branches which could have prevented the NPA.  Thus the micro management of branches by the Government.

Banks are supposed to conduct periodic inspection of units.  The inspection conducted by banks, among others, entails audit of stocks/inventory and receivables; verification of stocks and debtors; and verification of collateral.

The inspection is aimed to ensure that the money lent by them  is being used only for the intended  purpose and not diverted to unrelated activities/businesses. This awareness seems to have become acute after collapse of mega brands like Kingfisher Airlines and Deccan Chronicle Holdings Ltd.

Branch Managers rarely attach much importance to inspection of Units financed by their branches  as they have enough collaterals.  The branch managers have too much of other activities to bother about than go behind the same old client who gives such big presents every Diwali and new Year.

The situation in consortium lending is even worse. Each bank expects the other bank to do a thorough job!   A consortium loan (generally, a big-ticket loan) is extended by two or more banks jointly to a borrower. This helps banks spread the risks and keep the exposure within the permissible limits.  However the increase in NPA and CDR is maximum in this sector only.

The restructured standard asset to gross advances ratio of PSBs stands at 7.1 per cent (5.7 per cent).     The average gross NPAs to gross advances ratio all PSU banks is at 3.4 per cent as on March-end 2013 (from 2.9 per cent as on March-end 2012).   The appears to be so grim that the above figures will look puny when the new figures roll in

It is time the Government puts in a well thought of economic policy in place rather than having a restrictive policy of filing suits against the borrowers and auctioning off the properties.