Business Standard

Centre sees red in state govt-backed credit approvals

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Our Banking Bureau Mumbai
 The Centre warned that the incidence of such practices by banks/ FIs builds up state government guarantees beyond sustainable levels of debt.

 A committee constituted by government to assess the fiscal impact of the state government guarantees has viewed unfavourably, the tendency of banks/FIs rolling over their defaults to unbankable projects on the strength of guarantees and has recommended that the banks/FIs should eschew such practices. The government has accepted the recommendation of the Committee.

 In the light of this development, the RBI, therefore, has reiterated that that banks/FIs should appraise credit proposals received from SPVs/ public sector units, EWS housing and urban infrastructure on commercial basis with respect to viability and in accordance with the credit policy laid down by the board instead of relying solely on the strength of state government guarantees.

 The RBI, in a notification, pointed out that it has been advising banks, from time to time, that while financing projects under taken by both public sector and private sector undertakings, they should ensure that these are technically feasible, financially viable and bankable.

 In respect of financing of projects backed by state government guarantees also, banks/financial Institutions are required to exercise due diligence on the viability of the projects and state Government guarantees should not be taken as a substitute for satisfactory credit appraisal.

 Banks have been advised to ensure that the individual components of financing and returns on the project are well defined and assessed and appraisal requirements are not diluted on other considerations.

 

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First Published: Nov 25 2003 | 12:00 AM IST

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