 "Loan scams: Rajan warns banks on outsourcing key internal jobs")
As concerns mount over rising bad loans and scams at banks, the Reserve Bank today asked lenders to improve project evaluation skill internally instead of depending on external agencies, and to set up automated monitoring systems.
"We need better project evaluation through improved internal skills, not through intermediaries. A problem that has emerged in recent years and the recent scandals is the fact that the loan evaluation process has been outsourced," Reserve Bank Governor Raghuram Rajan said addressing an industry summit here.
Underlining the need for a rigorous assessment system, he said the "loan evaluation process is so central to banking that it is impossible to outsource. It has to be brought back in-house and competencies generated. We have to move towards engaged, informed banking and not getting done by engaging outside intermediaries."
He also warned them that further forbearance to deal with non-performing assets (NPAs) or bad loans is not an option and the answer lies in dealing with the problem upfront by raising more capital.
"We have to make sure that we don't give so much forbearance that we really don't know whether the asset is functioning or not...It creates enormous ever-greening and the end result is that bank balance-sheets have no meaning. The regulatory requirement is to make sure that banks' balance sheets continue to be informative," Rajan said.
"The true answer over time is raise more capital, to tide over the capital crunch of banks which have been getting depleted over the years," he added.
Asked during an interaction whether restructuring can be provided on project loans, Rajan warned that such a move could have serious implication on banks' balance sheets and investor perception.
Rajan said: "Ultimately, if the account is stressed it can be restructured. There is nothing that stand in the way of restructuring. But there will be implications on provisions and capital. If we start showing forbearance on that, then it runs the risk of diluting the entire balance sheet."
According to estimates, recast loans at about Rs 3.5 trillion (Rs 3.5 lakh crore) constitute nearly 6 per cent of the total banking system.
"We need better project evaluation through improved internal skills, not through intermediaries. A problem that has emerged in recent years and the recent scandals is the fact that the loan evaluation process has been outsourced," Reserve Bank Governor Raghuram Rajan said addressing an industry summit here.
Underlining the need for a rigorous assessment system, he said the "loan evaluation process is so central to banking that it is impossible to outsource. It has to be brought back in-house and competencies generated. We have to move towards engaged, informed banking and not getting done by engaging outside intermediaries."
More From This Section
Banks are the main source of funding for infrastructure projects and that will increase as the economy regains its lost momentum, Rajan said.
He also warned them that further forbearance to deal with non-performing assets (NPAs) or bad loans is not an option and the answer lies in dealing with the problem upfront by raising more capital.
"We have to make sure that we don't give so much forbearance that we really don't know whether the asset is functioning or not...It creates enormous ever-greening and the end result is that bank balance-sheets have no meaning. The regulatory requirement is to make sure that banks' balance sheets continue to be informative," Rajan said.
"The true answer over time is raise more capital, to tide over the capital crunch of banks which have been getting depleted over the years," he added.
Asked during an interaction whether restructuring can be provided on project loans, Rajan warned that such a move could have serious implication on banks' balance sheets and investor perception.
Rajan said: "Ultimately, if the account is stressed it can be restructured. There is nothing that stand in the way of restructuring. But there will be implications on provisions and capital. If we start showing forbearance on that, then it runs the risk of diluting the entire balance sheet."
According to estimates, recast loans at about Rs 3.5 trillion (Rs 3.5 lakh crore) constitute nearly 6 per cent of the total banking system.