RBI: Banks violating lending guidelines set by government entities

The Reserve Bank of India(RBI) vide Circular No. RBI/2022-23/71(DOR.CRE.REC.No.47/ 13.03.00/2022-23) dated 14th June 2022 notifies that banks are violating lending guidelines set by government entities.

The RBI has restated its earlier restrictions prohibiting banks from making loans to finance state government budgets, citing instances when lenders have broken the regulator’s rules.

Lenders also broke RBI rules when it came to offering bridging loans against monies owed to the central and state governments in the form of subsidies, refunds, reimbursements, and capital contributions.

As per RBI’s Circular:

We have come across instances where banks have not been strictly complying with our extant instructions on assessment of commercial viability, ascertainment of revenue streams for debt servicing obligations, and monitoring of end-use of funds in respect of their financing of infrastructure/ housing projects of government-owned entities.

Banks/ FIs have also been found to have violated our instructions which inter alia require that in case of projects undertaken by government-owned entities, term loans should be sanctioned only for corporate bodies; due diligence should be carried out on the viability and bankability of the projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations; and that the repayment/ servicing of debt is not from budgetary resources.

The banks’ attention is directed in particular to the precise instructions included in the paragraphs referenced in the Annex. It is emphasized that banks must adhere to these recommendations to the letter and spirit.

For Official Circular Download PDF Given Below: