Page 32 - A Banker Down the Rabbit Hole

Inflated invoices of Machinery financed
I came to know recently of a case at one branch of our bank that a loan
of Rs 12 crores was disbursed under consortium (a formal arrangement
with multiple banks). The bank credit disbursal team did not inspect the
installation of machinery presuming that it must have been done by the
leader of the consortium who likewise was under the impression that it
was the duty of each individual lending bank to inspect the particular
machinery financed by them.

Later, when the company defaulted, a full report on financial status of
assets available with the bank was prepared. It was discovered that they
had installed machinery worth Rs. 5 crores only. The rest of the funds
were diverted for creating their personal assets and investments through
inflated invoices. The bank conducted an internal enquiry and charged
them with negligence. I feel that whatever were the reasons, sometimes,
there is a laxity in timely follow up and supervision of loan accounts that
is attributable to its becoming NPA. Of course, there are cases of genuine
economic conditions for default beyond the control of the borrower.
There are some will full defaults also.

Insights from the episode

1. Monitoring of loan accounts brings out very early signals of difficulty
in the account. Diminished activity or no activity, closure of unit,
problems faced by the borrower in meeting liabilities are some of
such signals to take early steps for stopping the account becoming
NPA.
2. Again, the procedure outlined in Standard Operating Procedure
Manual had concrete objectives for following it in letter and spirit.

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