PSBs need an overhaul

This is with reference to “Streamlining our lending system” (March 23). The writer has asked the question as to why the public sector banks (PSBs) have bad loans. Having worked with the banking regulator, and as a board member in PSB, I can point to a number of reasons for this situation. Firstly, most of the loans given to large infrastructural projects such as steel, textile projects etc [which turned non-performing assets (NPAs)] were advanced by the PSBs. There was a lot of pressure, both political and from the government on the PSBs to lend to these projects. Secondly, many of the officers in the PSBs, who appraised these projects, simply didn't have the expertise to do so. Important factors like the cost of the inputs, availability of land etc were either ignored or not factored in the cost of the projects and their consequent viability. Loans were either advanced to unviable projects or excess finance was extended to viable ones. There were many instances of diversion of funds by the promoters to their other business. Thirdly, there was a lack of accountability on the part of the boards/committees of the boards while sanctioning loans. They went by the faulty appraisals of the PSBs instead of raising relevant questions while sanctioning loans. Ad hoc loans were sanctioned to enable the promoters to service interest payments of projects that had turned NPAs.

Fourthly, private banks that were players in these consortium finance arrangements were sharp and nimble enough to get out of the financing arrangements on initial signs of liquidity stress, selling their shares in the consortiums to the willing PSBs. Many private banks financed these projects outside the consortium, independently appraising the projects and taking separate collateral. Fifthly, the post disbursal supervision of these large loans advanced by the PSBs was very poor. The documentation was poor or faulty, collateral was not valued properly. Sixthly, in cases of suspected frauds, the PSBs were sloth-footed in ordering forensic audit for the fear of accountability being fixed on their staff. The government has infused capital and plans to infuse more capital in the PSBs. Unless basic reforms are initiated to change the way the PSBs work, how their top management is appointed and how their boards function, it will be merely a waste of the taxpayers' money as these problems will remain and surface later.

Arun Pasricha New Delhi