Even as India has been cited as an example of prudential banking norms, the Reserve Bank of India (RBI) today said some lenders are not monitoring effectively use of loans by borrowers, which is facilitating diversion of funds.
This came to light when the RBI, as a part of ongoing supervision, undertook an assessment of the practices in vogue at certain banks for ensuring the use of funds.
"The review revealed that the expected level of due diligence had not been exercised in some cases, facilitating diversion of funds by borrowers," the RBI said in a communication to Chairmen and Chief Executive Officers of banks.
The central bank found that the shortcomings, among others, included crediting of term loan disbursements to the current or cash credit accounts of borrowers and utilisation thereof for day-to-day operations.
Some banks exclusively rely on Chartered Accountants' certification both in regard to infusion of promoters' contribution and deployment of banks' funds, it found.
"In the context of the above, it is advised that the efficacy of the existing machinery in your bank for post-sanction supervision and follow-up of advances may please be evaluated and made robust, wherever considered necessary," it said.
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The RBI asked the lenders for periodical scrutiny of the books of accounts of the borrowers and introduction of stock audits depending upon the extent of exposure, besides other measures.
Effective monitoring of the use of funds lent is of critical importance in safeguarding a bank's interests, the central bank said.
"Further, this would also act as a deterrent for borrowers to misuse the credit facilities sanctioned, and in the process, help build a healthy credit culture in the Indian banking system," it added.
Diversion of funds, say for day-to-day purposes, may lead to default in some cases and add to bad debts of banks, experts say.
Net non-performing assets (NPAs) of banks rose to 1.12 per cent of total loans during 2009-10 from 1.05 per cent a year ago.
India has often been cited as having prudent banking norms which enabled it to significantly decouple itself from global financial crisis.