The CAG on Thursday criticised state-run Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) for sanctioning loans to independent power producers without following internal guidelines and RBI rules, leading to rise in bad loans.

"The REC and PFC did not conduct appropriate due diligence during credit appraisal and in the process assumed higher risks on the loan accounts," the Comptroller and Auditor General (CAG) said in its report tabled in the Lok Sabha.

The REC and the PFC disbursed loans of Rs 47,706.88 crore to independent power producers (IPPs) during 2013-14 and 2015-16, which were audited by the CAG.

"Non-Performing Assets (NPAs) related to IPP loans, in both companies, increased sharply to Rs 11,762.61 crore over a three-year period ending March 31, 2016," a CAG release said here.

As per the audit findings, the REC and the PFC estimated a higher tariff at the time of appraisal of loan proposals, which resulted in sanction of loans of Rs 8,662 crore in six cases "where the levelised generation cost was higher than the actual levelised tariff, rendering the viability of the project doubtful".

The CAG said the assessment of experience of project promoters was based on individual judgement, and that promoters who did not have relevant sector experience were often found eligible for loans. Many of these projects could not be completed within schedule.

"Nine projects had to be restructured multiple times, leading to increase in interest during construction by Rs 13,312.78 crore in six, and NPAs of Rs 3,038.44 crore in three loan cases," it said.

"The financial capacity of the promoters was not appropriately assessed in these cases and the promoters failed to bring in equity for the project in the face of competing demands," it added.

The REC and the PFC could not ensure end-utilisation of funds by the borrowers. The CAG found diversion of Rs 2,457.60 crore by the borrowers and promoters in five cases.

"Both the companies were solely dependent on Auditors Certificate regarding end-use of the funds, despite specific guidelines of the Reserve Bank of India in July 2013, which advised financing agencies to strengthen internal controls and credit risk management systems to enhance quality of loan portfolios," the official auditor said.