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The Central Vigilance Commission has cautioned public sector bank officials against laxity while financing Central and State public sector undertakings.
Public sector banks (PSBs) should not relax systems and procedures while financing the undertakings, said the Commission in a note to the Finance Ministry. The Ministry has, in turn, sent a communication to banks.
Huge losses
The Finance Ministry, in a communication to banks, cited cases — power distribution companies, Air India, National Agricultural Co-operative Marketing Federation of India Ltd (NAFED), ITI Ltd and Hindustan Photo Print — in the recent past which have led to huge losses to banks.
Due to the Central/State government backing PSUs, PSB officials were not paying attention to norms, rules and guidelines, thereby losing sight of the risks involved, observed the Commission.
These undertakings/corporations have often been permitted credit facilities with or without concessional rate of interest and other rebates/concessions without considering the price-risk of the credit facility and without undertaking cost-benefit analysis.
Economic parameters
As financing to the Central and State public sector undertakings normally is of considerable size, the eventual burden, in the event of default, on banks is also huge, said the Commission.
The Ministry emphasised that economic parameters applicable to evaluation of projects have to be the primary criteria for sanctioning loans.
“Availability of government guarantee should be reckoned only as risk mitigant and not as a statement of cash flow,” it said.
Specific exemptions favouring PSUs in the loan policy document should be dispensed with and normal credit appraisal should be done.
This will ensure that PSBs actually carry out the credit risk assessment exercise in the case of all exposures, including those to PSUs/government guaranteed exposures.
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