Banks fail to observe the directions while financing to Government owned entities: RBI

RBI on Tuesday said that Banks fail to observe its directions in letter and spirit while financing Government-owned entities.

As per RBI Master Directions, Banks should not grant finance for the construction of buildings meant purely for Government/Semi-Government offices, including Municipal and Panchayat offices. However, banks may grant loans for activities, which will be refinanced by institutions like NABARD.

However, according to the circular, Banks are allowed to extend term loans to state-level housing boards and other public agencies. In that case, banks must not extend credit facilities to them on the basis of the past performance in the matter of recovery from the beneficiaries but they should also stipulate that the Boards will ensure prompt and regular recovery of loan installments from the beneficiaries.

Further, the master circular specifies that the Projects undertaken by public sector entities that are not corporate bodies (i.e. public sector undertakings that are not registered under the Companies Act or which are not Corporations established under the relevant statute) may not be financed by banks.

In the case of Public sector corporate bodies, as defined above, banks should satisfy themselves that the project is run on commercial lines and that bank finance is not in lieu of or to substitute budgetary resources envisaged for the project. Nevertheless, the loan could supplement budgetary resources if such supplementing was contemplated in the project design, according to the Master circular.

Accordingly, in the case of a housing project of public sector entities, where the project is run on commercial lines, and the Government is interested in promoting the project either for the benefit of the weaker sections of the society or otherwise, and a part of the project cost is met by the Government through subsidies made available and/or contributions to the capital of the institutions taking up the project, the bank finance should be restricted to an amount arrived at after reducing from the total project cost the amount of subsidy/capital contribution receivable from the Government and any other resources proposed to be made available by the Government. This is in order to develop a healthy housing finance system, RBI said.

 “It is reiterated that banks are required to follow these instructions in letter and spirit,” the central bank said.

In the circular  Banks are also advised to carry out a review and place before their Boards, a comprehensive report on the status of compliance with the instructions within three months from the date of their circular dated June 14, 2022.