Flouting norms led to higher bad loans of REC, PFC: CAG

Government auditor CAG today slammed state-owned REC and PFC for not following internal guidelines and RBI rules in sanctioning loans to independent power producers that led to surge in bad loans.
"REC and PFC did not conduct appropriate due diligence during credit appraisal and in the process assumed higher risks on the loan accounts," the comptroller and auditor general said in its report tabled in Parliament.
It noted that both the Rural Electrification Corporation (REC) and the Power Finance Corporation (PFC) deviated from their internal guidelines and also did not conform to the Reserve Bank of India guidelines in this regard.

It also said experience and ability of promoters to develop projects was not assessed objectively as it was done based on individual judgement.
The auditor took note of many projects where the promoter had poor experience not completing within schedule.
The REC and the PFC disbursed loans of Rs 47,706.88 crore to independent power producers (IPPs) during 2013-14 and 2015 -16, which were audited by the CAG.

During the same period, non-performing assets (NPAs) went up to 13.90 per cent from 2.32 per cent in the case of REC and 19.86 per cent from 4.28 per cent at PFC.
In the sample selected for audit, nine projects had to be restructured multiple times, which increased interest by Rs 13,312.78 crore in six loan cases and resulted in NPAs of Rs 3,038.44 crore in three accounts.

The CAG observed that both entities estimated a higher tariff at the time of appraisal of loan proposals, which resulted in sanction of loans of Rs 8,662 crore in six cases.
In all these cases, the levelised generation cost was higher than the actual levelised tariff, and thus the viability of the project was doubtful, ab-initio, it added.
The official auditor further observed that the pre- disbursements conditions were relaxed by REC and PFC from time to time.
As per RBI guidelines (July 2013), financing agencies should not depend entirely on certificates issued by chartered accountants, but strengthen their internal controls and credit risk management system to enhance the quality of their loan portfolio.

However, the CAG said no policy was in place at the REC and the PFC to ensure end utilisation of funds by the borrower. It noted diversion of Rs 2,457.60 crore by the borrowers and promoters in the sample reviewed.
The CAG recommended that the process of appraisal of loan proposals, sanction and disbursement be strengthened.
It also suggested that compliance with internal guidelines and RBI norms may be ensured at every stage of the loan appraisal, sanction and disbursement.