The RBI is pushing banks to tighten the process of monitoring the end use of funds through enhanced surveillance as it seeks to arrest evergreening and prevent divergence of funds by corporate borrowers. 

Senior bank executives said the urgency from the RBI has been heightened after the annual asset quality review (AQR) initiated since 2015. The idea is to either check the origin of funds or the end use of funds to ensure that they are not being diverted or siphoned off. 

“Now, with technology, electronic payments and inter linkage between banks, it is possible to track funds. For example, if a big amount comes into my bank, we have to find whether this is part of any loan the corporate has taken or as a result of some asset sale. If these funds are from a third party, we are expected to dive deeper and ask whether the third party has any business dealings with the company,” said a senior executive with a private bank. 

Bankers point to an RBI circular released on December 5 which said companies having an aggregate fund-based working capital limit of Rs 150 crore and above from banks must borrow a minimum of 40 per cent of the sanctioned loans through working capital loans. Cash credit which by its nature is perpetual and comes without a time frame can be given only after this limit has been used. 

Bankers said the December 5 circular, which will be effective from April 1, is also a part of the central bank’s overall effort to enhance credit discipline among banks. 

“There are two or three facilities that banks offer, cash credit general facility and clear credit facilities. The recent RBI circular is aimed at ensuring most of the loans are borrowed as term loans for a specific purpose. This means that a company cannot keep on borrowing cash credit and invest it in a five-year project. In other words, the end usage of the lending will be monitored. If you get a Rs 100 cash credit, you will have to show receivables of a similar amount. The receivables are checked every quarter and any irregularity is the first sign of trouble,” said the chief risk officer of a private sector bank. 

This increased surveillance comes at a time when banks are battling record NPAs and some public sector banks are struggling to manage their day-to-day business for want of capital. Bankers say the heightened RBI watch is also a crucial element in preventing fresh NPAs. #casansaar (Source - Economic Times)