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Bankers' 3Cs phobia: More persons should be brought on board loan panels to make lending a responsible task

S Murlidharan

A surgeon who constantly worries about mortality on the operation table is usually hamstrung in his efficient discharge of duties. Similarly, a banker who constantly worries about being hauled over coals by the investigative agencies is likely to play it safe €" do not lend at all. Lending means responsibility and responsibility means enquiry should the loans sour sooner or later.

Our public sector banks (PSBs) reeling under the impact of heavy non-performing assets (NPAs) have been playing it safe, seeking the security of government gilts rather than the rough and tumble of industrial and infrastructure loans.

Finance Minister Nirmala Sitharaman, therefore, did well to exhort the bankers to overcome the 3Cs phobia€"the Comptroller and Auditor General of India (CAG), Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI). She forgot to add the 4th C€"Caesar's wife. Yes, bankers are like Caesar's wife who must be above suspicion. That they are deemed to be public servants for the purposes of the Indian Penal Code (IPC) makes their jobs onerous. Yet lend they must because otherwise, a bank would be failing in its basic role.

The PSB must do the following in the New Year:

1) As far as possible, involve at least two persons in the loan approval process. It is not enough to restrict a branch manager's powers to sanction loans. Even when a loan proposal moves up to the regional office, it should be a committee of officials that should sanction the loan. It is not as if a committee is not susceptible to overtures by the borrower to bend the rules. After collusive corruption is not something unheard of. Yet larger the number of persons in the decision-making loop, the lesser the chances of bending the rules.

2) Syndicated loans should be the preferred mode as there is always safety in numbers. Appraisal of the loan application is better and PSBs function with greater cohesion and cooperation.

3) Takeout financing for long gestation infrastructure projects must be implemented. At present, the specialised infrastructure financing agencies step into the scene after commercial banks are fairly in the advanced stage of nursing a loan. It should be the other way round. The specialists should be the ones who process the loan application and hand over the baton, as it were, to the banks once the project has gone on stream.

For PSBs apart from NPA, the other festering problem has been Asset Liability Mismatch (ALM) which often arises due to heavy exposures to infrastructure projects with long gestation periods. Banks typically accept deposits for medium-term apart from short term deposits usually for 3 to 5 years. In the event lending for infrastructure projects with repayments spread over seven to ten years proves to be suicidal. Ideally, three or four banks should be involved, with each picking up the loan portfolio for a period of three years after which it is passed onto another bank for three years and so on.

4) Banks must involve the officials involved in the loan sanctioning process in the recovery or collection process as well. A person who is going to recover is bound to be more careful while sanctioning. In short, there should be a dedicated team that should have an interface with a borrower right through the loan process.

5) A part of the remuneration of such loan cells in banks must be in the form of a very small sliver of collections or recoveries. If tax officials could be incentivised thus, there is no reason why banks' officials cannot be similarly incentivised.

These are some of the measures that can be taken by banks. Of course, it is the responsibility of the government to improve the climate of compliance. Insolvency and Bankruptcy Code (IBC) has started showing results, with company promoters shaking in their boots at the imminent prospect of losing control of their companies. But that does not mean a corresponding strengthening of hands of banks because IBC resolution process thus far has exacted a heavy price from the banks€"haircuts ranging from 50 percent to 60 percent. In the long run, such heavy haircuts would render the business of lending unviable.

Therefore, gradually bank finance must be made unavailable to big-ticket borrowers like listed companies. They must meet their fund requirements through bonds which is a ruthless place and tames defaulters more effectively and faster. A laggard and defaulter is recognised fast and his bonds attain the junk status thus jeopardizing his chances of mobilizing funds from the same market in the future.

(The author is a senior columnist and tweets @smurlidharan)

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