NPAs: Lessons to be Learnt
Apropos ‘Root of NPA Woes is the Restructuring Carried out During the Lehman Crisis’ by T K Arun (Sep 12), I resigned from the board of a major private sector bank in Kerala five years ago when, among other matters, my advice for due diligence that I strictly practised was not taken seriously — compliance was just cut-and-paste from websites. Plenty of liquidity available for more than a decade and sub-PLR lending (now withdrawn) facilitated the rat race for borrower accounts. Undue reliance on the appraisal by the ‘arranger/lead bank’ that paid a hefty fee upfront, abdicating the responsibility of monitoring end-use of funds by delegating it to the chartered accountant firms engaged by the consortium, and drawing comfort from the ratings by ratings agencies are practices that are perhaps still prevalent.
The introduction of the ‘corporate loan’ for ‘general working capital purposes’ made diversion of borrowed funds easier. Was there a robust mechanism to assess promoters’ estimates of project costs or were funds siphoned off at the implementation stage itself ? We have to learn lessons here. Bankers have to get back to the basics of prudence and character. At the same time, tormenting honest bankers will make them overcautious, leading to a disastrous impact on the economy.