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Dealing with bad loans
Source : The Hindu Property Plus Published On : 2010-12-11 City : Banglore

Play it safe: A careful scrutiny of all documents is required before buying a property

Even a few instances of irregularities in the sanctioning of housing loans are regrettable. But they may only pave the way for strengthening the quality of assets as the regulatory mechanism is expected to tighten the systems and procedures. First, let us see the causes and effects and then talk of the controls.

Loan sanctioning mechanism in financial institutions.

There are well-defined procedures in banks and FIs for consideration of loans of various kinds. The fundamental approach is to extend loans for genuine purposes. It is also generally ensured that the credit facilities are fully secured so that, in the event of the loan asset going bad, the lending institution can fall back on the collaterals for support and ultimate recovery. Some steps usually taken are:

Enquiry about people, projects, market etc.

Evaluation of viability and profitability.

Proper documentation.

Ensuring end use of funds.

Periodical follow-up, supervision and review.

Concurrent audit.

Inspection by external agencies.

How does fraud creep in?

Major areas of irregularities and scams can be:

Fraudulent records.

Errors in evaluation.

Undue favours.

Slack follow-up.

Some specific housing loan related frauds

The following can be some of the fraud-prone areas in property/housing loans:

Fraudulent title.

Smudged accounts.

Deviations from sanctions.

Diversion of funds.

Duplicate loans finding their place surreptitiously.

Releasing amounts without ensuring end use/progress in project implementation.

Multiple financing without regular consortium arrangement.

Failure of the consortium members in strictly implementing the terms/covenants of sanction.

The lack of control and supervision by the consortium leader.

Malpractices by staff.

How best to handle the scam/s

It is in the best interests of all concerned to follow these principles:

Don't panic. Any panic by borrower/lender or even controllers such as the government/RBI can harm the sector.

The investigating agencies need to be suitably briefed on the banking aspects of the issue.

Over-anxiety to book the perpetrators will only worsen the position.

There is need for a positive review of all identified accounts/other accounts.

Housing is equal to any other productive industry and needs to be examined in a positive manner. Punish only the real culprits and don't escalate the matter by creating a fear psychosis, which may affect the whole real estate sector. This sector needs to be nurtured and properly regulated.

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