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NEW DELHI : Statutory auditors of banks are responsible for detecting the ills plaguing the sector and cannot shy away from flagging instances of evergreening of bad loans and zombie lending that constrained the growth of the financial sector, chief economic adviser Krishnamurthy Subramanian said here on Tuesday.

Lending to cronies in business was resulting in capital flowing to entities that were not the most creditworthy and this impaired the quality of lending on large loans, Subramanian said.

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This problem gets exacerbated in case of the infrastructure sector, Subramanian said at a virtual conference on ‘Distressed debt in infrastructure sector with special focus on engineering, procurement and construction’ organized by industry body Federation of Indian Chambers of Commerce and Industry (FICCI).

“This is the elephant in the room that needs to be spoken about. Avoiding crony lending like the plague has to be the mantra for the financial services sector," said Subramanian.

Subramanian’s message comes in the context of a continued rift between auditors and policy makers about the role of statutory auditors. While regulators expect auditors to sniff out the lapses and frauds in their clients, auditors believe their job ends with certifying their clients’ financial statements as a true reflection of their affairs. Audit regulator National Financial Reporting Authority (NFRA) has in the last two years pointed out alleged lapses in the audit of IL&FS Financial Services Ltd (IFIN) by different auditors.

Compensation of senior management in banks has to be curtailed if evergreening and zombie lending is identified, Subramanian suggested. The board of directors cannot be asleep at the wheel, he said. Auditors are the first line of defence on this and they have to comb through loans to identify instances of this, he said.

“Auditors cannot say this is something they cannot do. Data analytics can do. Zombie lending and evergreening should be avoided as they lead to suboptimal capital allocation," Subramanian said.

Lending to cronies prevented the growth of Indian lenders, Subramanian said.

The banking and financial sector is very small compared to the size of the overall economy on any parameter. “That is mainly because the financial sector as a whole is still to figure out a model to make large corporate loans and large infrastructure loans, which is a subset of that, in a way that does not lead to non-performing assets," Subramanian said.

It is extremely important that the financial sector, the ultimate arbiter of capital, takes the responsibility for ensuring optimal capital allocation in the economy, he said.

As regulatory permissions, land acquisition and environmental clearances are involved in the infrastructure sector, business interactions with agencies create the potential for greater crony lending possibly in this sector, he explained.

Insolvency and Bankruptcy Board of India (IBBI) chairperson M.S. Sahoo explained that even businesses with less assets, such as engineering, procurement, and construction firms have successfully achieved bankruptcy resolution under the Insolvency and Bankruptcy Code (IBC). About 300 of the companies admitted to tribunals for bankruptcy resolution have achieved resolution. On an average, the liquidation values of the assets of these companies were about 22-23% of the claim amounts raised by creditors. On resolution, the creditors were able to recover about 200% of the liquidation value, implying even companies with fewer assets have benefited under the IBC.

ABOUT THE AUTHOR

Gireesh Chandra Prasad

Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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