Lenders against plan to limit appraisals for large loans to big banks

Mumbai : Lenders have rejected a proposal put forth by the department of financial services (DFS) that said credit appraisals for loans above R500 crore should be done by the larger banks. The Indian Banks’ Association (IBA) has written to the finance ministry saying the proposal was not a workable one, sources in the know told FE.

Members are of the view that this proposal to restrict the credit appraisal process to some five or six banks is not in best interest of the banking industry,” the IBA letter sent to the ministry of finance noted.

An IBA official confirmed the association had replied to the ministry citing the views of bankers but had not yet got a response.

At the managing committee meeting of the association last month, bankers pointed out they were satisfied with the current process of each bank appraising the risk on its own rather than relying on the lead banker. Among the banks that the ministry had suggested should do credit appraisals are State Bank of India (SBI), ICICI Bank, Bank of Baroda and IDBI Bank.

Bankers are hoping the finance ministry will agree with its views since they believe collective due diligence may not work. SBI chairman Arundhati Bhattacharya had said recently that only if the due diligence was done by the banks themselves would a proper appraisal be possible.”You won’t be able to take the right decision until you understand the risks and the appetite for it,” Bhattacharya had said.

Bankers pointed out that while intermediaries like SBI Capital Markets do undertake the credit appraisals for consortium loans, banks do not depend on their assessments and carry out the due diligence themselves. The ministry had last month expressed concerns regarding the due diligence process, questioning the outsourcing of the process to an intermediary that appraises the exposure on the bank’s behalf. The concerns stem from the large amounts of non-performing assets (NPAs) that public sector banks have on their books. The ratio of gross NPAs to gross advances stood at 4.1% in FY14, up 70 basis points (bps) from 3.4% reported in the previous financial year, according to Reserve Bank of India. Net NPAs, on the other hand, were up 50 bps to 2.2%.