What changed
RBI reviewed bank practices and found that term loan disbursements were often credited to current/cash credit accounts and used for daily operations, bypassing end-use checks. Banks also relied too heavily on auditor certificates without independent verification. The circular mandates banks to evaluate and strengthen their post-sanction monitoring systems with specific measures like periodic inspections, stock audits, and borrower certifications.
What it means for you
Banks must overhaul their loan monitoring processes to prevent fund diversion, which can lead to NPAs and reputational risk. This will increase operational costs for compliance but will improve credit discipline and asset quality. Lenders need to integrate these checks into their credit risk management frameworks and ensure branch-level adherence.
What you must do
- Evaluate and strengthen your bank's post-sanction supervision and follow-up mechanisms for all advances.
- Implement meaningful scrutiny of periodic progress reports and financial statements of borrowers.
- Conduct regular visits to assisted units and inspect charged/hypothecated securities.
- Introduce stock audits based on exposure levels and obtain borrower certificates on fund utilization.
- Incorporate covenants in loan agreements for separate auditor certifications on fund diversion if needed.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Credit risk and monitoring teams, Branch managers and loan officers, Internal audit and inspection departments
Why did RBI issue this circular on end-use monitoring?
RBI found that some banks were not exercising adequate due diligence, leading to diversion of loan funds by borrowers. For example, term loan disbursements were being credited to current accounts and used for day-to-day operations instead of the intended purpose.
What specific actions must banks take to comply?
Banks must evaluate and strengthen their post-sanction supervision, including scrutiny of progress reports, regular site visits, inspection of securities, stock audits based on exposure, and obtaining borrower certificates. They should also consider separate auditor mandates for detecting fund diversion.
How does this affect borrowers?
Borrowers will face stricter monitoring of fund utilization, including periodic inspections and certification requirements. Incorrect certification may lead to withdrawal of facilities or legal action, promoting a healthier credit culture.