Government seeks PSU bank role in speedy project approvals

MUMBAI: Agovernment desperate to halt the slide in economic growth rate has directed state-run bankers to wear the hat of a middleman and negotiate with bureaucrats for faster project clearances.

Public sector banks, which account for more than three-fourths of the industry, have been ordered to clear loan applications within 30 days in some cases, which bankers fear may lead to slack due diligence that will turn into bad loans in future.

"The loan application pending for want of response or information from different state governments may be followed up by zonal offices concerned with the respective state government department for expeditious clearance," abureaucrat in the finance ministry has written to chiefs of public sector banks.

The letter may have come after firstquarter gross domestic product (GDP) growth came in at 7.7%, compared with 9.4% in the fourth quarter of fiscal 2010. Growth has been slowing as the Reserve Bank of India has raised interest rates 11 times since March last year to tame inflation. The central bank believes demand is still robust since corporate earnings growth remains strong, though profitability has eroded a bit.

"State-level bankers' committee may also consider requesting the chief secretary of respective states for expeditious clearance of projects coming up in the state, where banking and financial institutions have sanctioned their projects but disbursement is pending for want of clearance," the letter to bank chairmen says.

Banks wary of bad loans

While the government may be worried about the slowdown in credit growth, which was at 2.7% between April and August 2011, compared with 3.8% in the year-earlier period, banks are careful in lending to projects that have not received clearance from different departments.

"Since this is merchant banking activity expected out of a bank, they should be compensated for it likewise," said Hemindra Hazari, head of equity research at Nirmal Bang Institutional Equities. "But more importantly, the onus is on the state government to pursue projects because they benefit from them more in terms of development of the state."

Source: Economic Times