LOAN APPRAISAL AND SANCTION SYSTEM

In our country one of the major reason for high defaults in borrowing is “faulty appraisal and sanction system”. Although other reasons may be lack of monitoring, faulty disbursements, lack lustre legal process, laid back approach of lenders etc., but as mentioned by me earlier, the beginning of any exposure is mainly happens at the stage of approval of the loans. In my view the system of sanctioning needs to be overhauled urgently if lenders are rally serious in improving the asset quality, else the mounting NPA can have tremendous growth in years to come. Some of the fault lines are :

1.     As noticed many times the lending is always dominated by the personal factors of sanctioning authority, relationship with the borrowers, connections of the borrowers, track record of the borrowers in the past and asset coverage. Many of the parameters are compromised during the process. There should be honest appraisal irrespective to the factors mentioned above.

2.     Focus on proposed business is not as desired instead the security and net worth ( on papers) are given more weight age while deciding the lending. No lender can jump into disposal of security to recover money instead of improving the lending quality. Further the valuations are always disputed and managed depending upon the purpose. Valuation of a security for borrowing is always exaggerated whereas the valuation of same property by Same valuers at the time of disposal goes down substantially. I don't understand how can such valuers continue to associate with the lenders for long. There should be strict appraisal norms on the proposed business / requirement instead of security side.

3.     Exaggerated Future projections are another key factors in faulty appraisal. Every projections are made so rosy as if every thing in this world will change and no challenge will be faced in future. The tendency to see the rosy picture by lenders pose threat to themselves only . The approach towards projections should be more conservative. Infact, to convince the higher authorities, the projections are made so good that all the parameters are immediately met up and there remains no negativity about the future of the business. How it is possible that no challenge in future is taken care in the business plan. It seems that current appraisal system is based on paper horses where every thing mentioned on paper is considered as final for decision making. 

4.     Administrative set up like hierarchy of officers, low commitment to the PSU employers, slow legal process, Delayed decisions also affect the quality of loans. Ego of the officers also plays major role in lending. Once the ego is satisfied, the decision making turns into emotional decisions instead of professional view.