What changed
RBI reiterated existing safeguards but added stricter measures for accounts at risk of turning NPA, including more frequent inspections, ensuring sale proceeds are routed through the borrower's account, and insisting on pledge of stock instead of hypothecation. It also clarified that non-credit of sale proceeds from hypothecated stock to the loan account should normally be treated as fraud.
What it means for you
UCBs must now treat any sale of hypothecated stock without crediting proceeds to the loan account as a potential fraud, requiring immediate action to secure remaining stock. This raises the bar for monitoring and reporting, increasing operational burden but aiming to reduce NPAs and fraud. Banks need to update their internal monitoring systems and train staff to identify and act on diversion of funds promptly.
What you must do
- Review and strengthen post-sanction monitoring mechanisms, especially for accounts showing signs of stress.
- Implement more frequent inspections of borrowers' godowns and ensure sale proceeds are routed through the borrower's account with the bank.
- For stressed accounts, insist on pledge of stock instead of hypothecation to improve security.
- Treat non-credit of sale proceeds from hypothecated stock as fraud and take immediate steps to secure remaining stock.
- Train staff to identify diversion of funds and take appropriate action against borrowers to protect the bank's interest.
Who it affects
All Primary (Urban) Co-operative Banks, Credit monitoring and risk management teams, Branch managers handling loan accounts, Audit and inspection departments
What constitutes diversion of funds under this circular?
Diversion includes using credit facilities for purposes other than sanctioned, making payments to parties unconnected with the borrower's business, and non-credit of sale proceeds from hypothecated stock to the loan account.
What action should a bank take if sale proceeds from hypothecated stock are not credited?
Such action should normally be treated as fraud. Banks must immediately secure the remaining stock to prevent further erosion of security value and take other warranted actions.
Does this circular apply to all loan accounts or only stressed ones?
The stricter safeguards (frequent inspections, pledge of stock) are specifically advised for accounts showing signs of turning NPA. However, general monitoring of end-use applies to all advances.