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Mumbai: India’s public sector banks seem to be in the grip of a fear psychosis after a series of investigations by government agencies of bank lending to the telecom, mining and real estate sectors. This has stalled decision-making at the lenders that account for close to three-quarters of the banking industry’s assets.

Allegations of irregularities in the allocation of second-generation (2G) telecom spectrum and licences and in the offer of coal mines to companies for captive use have led to multiple investigations.

The Comptroller and Auditor General of India (CAG) has estimated notional losses to the exchequer at 1.76 trillion because of the allotment, rather than auction, of spectrum, and 1.86 trillion in the doling out of coalfields.

The fallout of investigations into bank lending, coupled with uncertainty in government policies, have snarled up the decision-making process at state-owned lenders because bankers are fearful of being punished for a decision that may go bad. Bankers are also grappling withan uncertain investment climate after the revelations of improprieties and flawed government policies in the allocation of natural resources.

“I will not call it a fear psychosis, but it is a fact that officers are exercising extreme caution. Decision-making has slowed," said Bhaskar Sen, chairman and managing director (CMD) of Kolkata-based United Bank of India.

Mint spoke to seven senior bankers for this news report, and most of them requested anonymity because of the sensitive nature of the matter.

“This is unfair. Every time we are targeted. We are subject to CVC (Central Vigilance Commission) probes. Private sector bankers also do irresponsible lending, but they are not under any scanner. Most of us now prefer to sit idle," said the chairman of a large government bank.

“If something goes wrong in a private bank, the official involved gets suspended, but a public sector banker is haunted till his death for a business decision that goes bad. He is deprived of his post-retirement benefits," the chairman said.

As of 27 July, Indian banks had loans outstanding of just above 36,600 crore to the mining and quarrying sector, and 93,170 crore to the telecommunications sector. These figures were 27,190 crore and 90,770 crore, respectively, a year ago.

The banks are running the risk of a chunk of these assets going bad. If indeed that happens, they need to set aside money to cover the bad loans and that will affect their profitability.

India’s banking sector came under the lens of various investigative agencies first in 2010 when CAG published its report on spectrum allocation. Banks became cautious about their exposure to the telecom sector when the Supreme Court, in February, cancelled 122 telecom licences and 2G spectrum allocated in 2008 on the grounds that the allotment process was flawed. In August, CAG cited irregularities in the allotment of 57 coal blocks to private parties.

Bankers said a sense of insecurity has gripped even mid-level executives, who are putting off decisions on critical transactions. “We are afraid and business is hampered a lot," said a senior official in charge of corporate loans at a Mumbai-based state-run bank.

The telecom and mining sectors apart, lending to real estate, too, came under stress after the Central Bureau of Investigation in 2010 arrested several bank officials, busting a corporate loan racket.

Banks typically adopt a consortium approach while lending to large projects in such sectors.

“Borrowers have become too large these days. There is a problem in monitoring the end-use of the funds. All members of the consortium expect that the lead bank will take care and monitor the projects, but often that does not happen," said an executive director at a public sector bank.

“Banks are cautious on infrastructure because of the issues with coal linkages and supply constraints. Banks like us always lend to these sectors through syndication with other banks after studying the project. We will continue to look at coal linkages and gas linkages before giving loans," said Abraham Chacko, executive director, Federal Bank Ltd.

Analysts said a cautious approach adopted by the bankers has already begun to impede credit flows to crucial sectors. “Bankers have already become cautious when lending to sectors linked to infrastructure. They are selective in lending to these sectors and credit flow has slowed," said S. Ranganathan, head of research at Mumbai-based brokerage firm LKP Securities Ltd.

Mounting bad loans are a major concern of the banking system. Indian banks’ non-performing assets (NPAs) rose 46% to 1.37 trillion in fiscal 2012.

Credit demand is likely to remain muted, said Nilanjan Karfa, an analyst at Brics Securities Ltd. “I don’t think banks will be able to substitute credit demand from the infrastructure sector because consumption demand has slowed. The contribution from the infrastructure sector has declined. I, therefore, expect credit growth for fiscal 2013 to ease to 13-14%, much below the 17% estimate of the Reserve Bank of India," Karfa said.

Canara Bank and Central Bank of India have already cut credit growth targets for fiscal 2013. Both lenders now expect growth to be around 15% from about 18-20% projected earlier.

S.L. Bansal, CMD of Oriental Bank of Commerce, however, has a different take on the matter. “So far, no account, neither in telecom nor in coal, has become an NPA," he said. “Bankers have gone by the strict norms while lending to these companies; there is nothing that we should fear."

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