Monitor end-use of loans, RBI tells banks

The Reserve Bank of India on Friday directed banks to actively monitor the end use of term loans raised by corporate houses for specific projects, and not merely rely on statements issued by chartered accountants.

After a recent round of bank supervision, the central bank said its review has found that in some cases banks are not following the expected level of due diligence, thus facilitating diversion of funds by the borrowers.

The shortcomings, according to RBI, included crediting of term loan disbursements to the current/cash credit accounts of borrowers, who then utilise it for day-to-day operations, and the exclusive reliance on chartered accountants' certification ''both in regard to infusion of promoters' contribution and deployment of banks' funds".

The directive comes a few days after the Central Bureau of Investigation launched a preliminary enquiry into term loans extended by banks to companies that successfully bid for 2G telecom licences in 2008.

The CBI had launched its inquiry on the directions of the Supreme Court after realising that state-owned banks have been lending thousands of crores against hypothecation of licences.

According to a report, bankers said that there was no scandal in bank lending to telecom companies. However, they said that there could be individual cases where guidelines pertaining to project loans were not followed.

The RBI has asked banks to undertake periodic scrutiny of project reports submitted by those who have availed term loans. Also lenders have been asked to physically inspect the securities charged to the bank and inspect the books of the borrower.

The RBI said that effective monitoring of the end use will act as a deterrent for borrowers to misuse the loan amount besides safeguarding the bank's interest.