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RBI asks Banks to get tough on Hypothecation


RBI asks Banks to get tough on Hypothecation

Last updated: October 11 2007
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  • RBI asks Banks to get tough on Hypothecation

    The Reserve Bank of India (RBI) recently asked banks to treat instances where companies do not credit the sale proceeds from hypothecated goods to their loan accounts as fraud.

    The central bank directed banks, in such cases, to take immediate steps to secure the remaining stock so as to prevent further erosion in the value of available security and any other action as warranted.

    “The central bank is concerned about diversion of funds. If a stock is sold and the funds are not credited to the account, it is mis-utilisation of funds and should be treated as fraud,’’ said a senior banker. Further, the central bank reiterated its advice to commercial banks about conducting stringent monitoring of borrower assets.

    “These guidelines have been around for sometime. The central bank is only re-stating them. It is possible that the department of banking supervision, in its regular inspection, would have come across incidents of fraud and hence would have issued this circular,’’ said a public sector banker.

    The banking regulator has been expressing concern, time and again, on the end-use of funds and misutilisation of funds. In the light of the booming stock and real estate market, the concerns have only become graver.

    “The RBI is concerned that some adventurous corporate heads were mis-utilising bank credit lines and investing in stock markets and real estate to make quick gains,’’ said a banker.

    The RBI has asked banks to implement stringent safeguards pertaining to monitoring of advances. These would include regular inspection of borrowers’ assets mortgaged with the banks, periodical visits to the assisted units and stock audits especially where accounts show signs of turning into non-performing assets.

    The RBI wants banks to strengthen their monitoring systems by frequently inspecting borrowers’ godowns, ensuring that sale proceeds are routed through the borrower’s accounts maintained with the bank and insisting on pledge of stock in place of hypothecation.

    Source: Business Standard
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