Bank loans

RBI does not have data on bank lending to government entities

Bombay : Despite chastising banks for flouting standards while lending to government entities, the Reserve Bank of India (RBI) has no data on the extent of such violations, a lawsuit has revealed. information (RTI).

Last month, RBI warned banks against violations of its guidelines when lending to certain infrastructure and housing projects of public entities.

Banks and financial institutions, the regulator said, also breached instructions that “term loans should only be sanctioned to legal persons” for projects undertaken by public entities. In an earlier circular of July 2015, the RBI defined juridical persons as public sector enterprises registered under the Companies Act or a company incorporated under the relevant law.

In response to an RTI request filed by Mint, RBI said it does not have information on the amount of these violations. Asked about the amount of loans for which the regulator encountered such cases described in the June 14 notification, RBI said: “the information sought is not available.”

Industry experts said the problem stemmed from off-balance sheet borrowing by state governments. These are loans raised by state government entities and special purpose vehicles, backed by respective state guarantees. The banks were found to lend large sums to some state government entities, although these borrowers had no cash flow from which the loans would be repaid.

Rating agency Icra said in May that anecdotal evidence suggests off-balance sheet lending has increased in some states in recent years. “Suppose a state government entity in food distribution raises loans from banks despite having no cash flow. The entity is in the business of buying food grains and selling them at a subsidized price, thereby incurring a loss,” said an analyst who tracks state government debt.

He said the central government and the RBI were concerned that the amount of such off-balance sheet borrowing would increase, allowing states to hide their budget deficits.

“It created systemic risk as the aggregate sum of these borrowings began to increase. Even some grants were funded by such loans rather than budgetary sources,” the analyst said.

A senior private sector banker said the Reserve Bank appears to have found instances where some banks have to lend to state government infrastructure projects without proper assessment of future revenues. “Project loans are allowed, but bank loans cannot replace equity used in the project,” the banker quoted above said.

In July 2015, the central bank said that these term loans are not intended to replace the budgetary resources planned for the project. Even then, the Reserve Bank said it had found instances where banks had provided financial aid to state-owned public sector enterprises that did not meet the above standards.

Citing a banking industry source, the Informist news agency reported on June 15 that RBI issued the circular after an extensive supervisory study showed deficiencies in monitoring, provisioning and risk assessment in these case.

In a May 4 report, Crisil Ratings said off-balance sheet state borrowing would have hit a ten-year high of 4.5% of state gross domestic product (PISG), or 7.9 trillion in 2021-22. This represents an increase of 100 basis points (bps) from fiscal year 2020, according to a study of 11 states that represent 75% of the aggregate GSDP.

The states analyzed in this Crisil study included Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh and Kerala.

That said, states have their own financial constraints. The covid-19 pandemic has reduced their income at a time when expenses have increased dramatically.

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