NPAs: Les­sons to be Learnt

The Economic Times - - The Edit Page -

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.

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