Banks have not been able to check diversion of funds: SBI Chairman

Noting that banking is done based on trust and good faith, State Bank of India Chairman Rajnish Kumar said that one of the biggest learnings from the recent developments such as DHFL and PMC Bank is how lenders monitor the end use of funds and check diversion of funds.

“One of the most difficult aspects, whether it is for Dewan Housing Finance Corporation Ltd (DHFL) or any other corporate is that banks themselves have not been able to check the diversion of funds. It has emerged as a big problem,” he said, adding that banks have to find a way to do it.

He noted that while banks do due diligence before sanctioning loans, they cannot keep policing every account. “If that is what a bank has to do, then it will take years to lend to one account,” he said.

In an interview with BusinessLine , Kumar said that while businesses often fail due to a change in the macro-economic environment, there has to be a clear distinction of failure of business due to diversion of funds. “The biggest problem in the clean-up exercise is not using the fund for what it was meant to be...it has brought a lot of misery to corporates, promoters and banks. I hope that everybody has learnt their lessons and if the funds are used for the purpose meant to be,” said Kumar.

Terming the default by DHFL as an exception as it is not the norm for a AAA account to slip to ‘D’ or ‘junk’ overnight, Kumar, however, said that the corporate governance philosophy of the company is important and the first level of check lies with the auditor.

“I think auditors are still the best people to detect because they do a very deep dive. Rating agencies don’t do that kind of deep dive. Auditors have the first level of comfort. Banks also ask for audited balance sheet, which is a true and fair statement of affairs,” he said.

SBI has also begun to revamp its internal credit risk management architecture, which consists of pre-sanction, sanction and post-sanction, and then stressed asset and NPA recovery.

Kumar said that work is going on to strengthen the post-sanction monitoring and the end use of funds.

‘H2 usually better, but more reforms needed’

Remaining optimistic about a pick-up in economic growth, Rajnish Kumar said that GDP growth in the second half of the fiscal may be better, but the government needs to undertake many more reforms, especially for infrastructure financing.

Noting that there have been regular government interventions to attract investments with steps like the reduction in the corporate tax rate and the relief for the telecom sector, Kumar told BusinessLine that a “real push” is required for infrastructure financing to bring in private investments.

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“Whatever were the issues in the first phase of the public-private partnership model need to be addressed. In the PPP model, the private investor should have a hassle-free experience.

“Unfortunately, it was not the case and many investors got stuck, so we have to bring back the confidence,” Kumar said.

Asked about State governments withdrawing power contracts, he said the sanctity of contracts in the ease of doing business is turning into a big issue. “When an investment is made, it is made on certain assumptions and then if midway they are changed, then the investor’s capability to invest further gets impacted very adversely,” he said.

On economic growth, Kumar said that indicators like GST collections had showed an improvement in October.

“That was September quarter... We are in the busy season... generally the second half is better. But a lot of investment is required to push the growth rate to what we hope it will be,” he said.

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