RBI CALLS FOR CLOSER SCRUTINY OF END-USE OF FUNDS

The Reserve Bank of India asked banks to improve the efficacy of their existing machinery for supervision and follow-up of advances to check diversion of funds by borrowers.

The RBI called upon banks to strengthen their systems and procedures so that meaningful scrutiny of periodical progress reports and operating/ financial statements of borrowers takes place. It wants banks to ensure that their officials pay regular visits to the assisted units and inspect securities charged/ hypothecated to banks and also undertake periodical scrutiny of the books of accounts of the borrowers.

This directive to banks comes in the backdrop of the central bank coming across shortcomings, including crediting of term loan disbursements to the current/ cash credit accounts of borrowers and utilisation thereof for day-to-day operations, as also, exclusive reliance on Chartered Accountants' certification both in regard to infusion of promoters' contribution and deployment of banks' funds.

Bankers say the RBI wants tight monitoring of end use of funds in light of the recent 2G scam. Certain realty companies, which floated telecom ventures two years back, had successfully bid for 2G licences with bank funding. However, these companies subsequently sold a chunk of their holding in their telecom ventures at a hefty premium to foreign telecom firms and diverted the sale proceeds into real estate projects.

Audits

As part of the exercise to monitor end-use of funds, banks are required to introduce stock audits depending upon the extent of exposure and examine all aspects of diversion of funds during internal audit/ inspection of the branches and at the time of periodical reviews.

Further, banks have to obtain certificates from the borrowers that the funds have been utilised for the purposes approved and in case of incorrect certification, initiate prompt action as may be warranted. The action could include withdrawal of the facilities sanctioned and legal recourse as well.

In case a specific certification regarding diversion/siphoning of funds is desired from the auditors of the borrowers, the RBI said, a separate mandate may be awarded to them and appropriate covenants incorporated in the loan agreements.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article1093295.ece