Mumbai: The Reserve Bank has blamed conflicts of interest among merchant bankers as one of the prime reasons for faulty project appraisals that has led to the piling up of huge non-performing assets in the system which has crossed 10 per cent or over Rs 10 trillion as of the September quarter. “The impairment crisis in the banks has also highlighted certain basic deficiencies with regard to the appraisal of long-term projects with a significant gestation time,” the central bank said in the Financial Stability Report (FSR) for the first half of FY18.
“A significant part of such projects undertaken were consortium lending with appraisals being carried out by professional merchant bankers with built-in conflicts of interest (since they are paid by the borrowers),” the report said. It can be noted that since the public sector banks (PSBs) dominate the credit space, lead by SBI, lenders have been engaging SBI Caps, the merchant banking arm of SBI, for both loan appraisals as well as loan restructuring and even project appraisals.
With a gross NPA ratio which increased by 19.3 per cent, the corporate sector contributed highest to dud assets among all segments, and was primarily led by metals, power, engineering, infrastructure and construction sectors, which involve project appraisals. The GNPAs in basic metals and metal products were 44.5 per cent, that of construction stood at 26.7 per cent, infrastructure (19.6 per cent) and engineering GNPAs zoomed to 31 per cent, the report said.
The report has projected GNPAs to jump to 10.8 per cent by the March quarter and to 11.1 per cent by September 2018 and blamed the spike to primarily to private sector banks which had been under-reporting their dud loans. In the September quarter, the GNPAs had spiked to 10.2 per cent from 9.6 per cent six months earlier. “The banking stability indicator (BSI) shows that the risks remain at an elevated level weighed down by further asset quality deterioration,” the FSR noted.
PTI