RBI flags lack of due diligence in bank funding to govt-owned entities

The Reserve Bank of India (RBI) on Tuesday flagged instances of poor due diligence by banks while funding government-owned entities. As a corrective measure, the regulator has asked banks to compile comprehensive reports on the status of compliance with a set of instructions on the criteria for financing within three months.

We have come across instances where banks have not been strictly complying with our extant instructions on assessment of commercial viability, ascertainment of revenue streams for debt servicing obligations and monitoring of end use of funds in respect of their financing of infrastructure/ housing projects of government-owned entities,” the RBI said in a notification.

Banks and financial institutions have also been found to have violated the central bank’s instructions which require that in case of projects undertaken by government-owned entities, term loans should be sanctioned only for corporate bodies, due diligence should be carried out on viability and bankability of projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations, and that the repayment or servicing of debt is not from budgetary resources.

Laying down a set of specific instructions in an annex accompanying Tuesday’s circular, the RBI reiterated that banks must follow them in letter and spirit.

Banks are advised to carry out a review and place before their boards a comprehensive report on the status of compliance with the instructions within three months from the date of this circular,” the notification said.

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