The Reserve Bank of India can give banks more flexibility to restructure distressed loans in a bid to steer funding towards cash-strapped infrastructure projects, Governor Raghuram Rajan said here on Tuesday.
Dr. Rajan, however, said the RBI would continue to ensure lenders flag and deal with problematic loans quickly, given the dangers to the financial system should banks engage in ‘ostrich-like’ behaviour of ‘hoping the problem will go away’.
Reviving investment and boosting infrastructure are two key objectives for Prime Minister Narendra Modi, who won elections in May promising to rekindle the faltering economy after two years of growth below 5 per cent.
A major factor slowing credit flows to infrastructure projects has been the amount of bad loans on banks’ books. Including restructured loans, stressed assets are estimated at Rs.6 lakh crore ($97 billion), or nearly a tenth of total loans.
“The RBI is exploring ways to allow banks more flexibility in restructuring,’’ Dr. Rajan said in a speech at the Institute of Rural Management here.
“This is a risk we are prepared to take if it allows more projects to be set on the track to recovery,’’ he said, without giving details of measures being explored.
Still, Dr. Rajan said the central bank would oppose any delay by banks to recognise bad loans.
About 45 per cent of stressed loans have already gone sour. The remainder is in the ‘restructured’ category, which means the loans have problems but banks only need to set aside minimal reserves.
From April next, new rules will abolish the ‘restructured’ category and prompt banks to chase customers for payment or set aside billions more reserves, once non-performing loans are recognised.
“The fundamental lesson of every situation of banking stress in recent years across the world is to recognise and flag the problem loans quickly and deal with them,’’ Dr. Rajan said.
“So, regulatory forbearance, which is a euphemism for regulators collaborating with banks to hide problems and push them into the future, is a bad idea.’’
Dr. Rajan also warned of the negative consequences of borrowers defaulting without suffering a financial hit as this raised the cost of loans across the financial system — reiterating his previous comments.
Dr. Rajan estimated that power loans were three percentage points more expensive than home loans due to banks’ concerns about recovering debts from these types of borrowers.
The central bank tightened rules against these defaulters in September.
‘Riskless capitalism’ Accusing some large borrowers of enjoying ‘riskless capitalism’, Dr. Rajan said such entities were responsible for making banks’ credit profile unhealthy and these big clients were in effect becoming ‘freeloaders’ in the banking system.
Dr. Rajan also said it was the taxpayers and honest borrowers who end up paying the price for losses suffered by state-run banks due to bad loans given to a few big borrowers.
A large borrower, whose loan has turned bad, should not be “lionised as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country,” the RBI Governor said. Asserting that he is not against risk-taking, Dr. Rajan said in cases of any stress, the promoter threatened to run an enterprise to the ground, asking the government, banks and regulators to make necessary concessions to keep it afloat. “We have to ask if our system of credit is healthy. Unfortunately, the answer is that it is not. The sanctity of the debt contract has been continuously eroded in recent years, not by the small borrower, but by the large borrower,” Dr. Rajan said. In scathing remarks on the misuse of the system by the large borrowers, Dr. Rajan said taxpayers and honest borrowers end up paying the price due to the excesses committed by large borrowers by way of losses to state-run banks and high pricing of loans.
“If the enterprise regains health, the promoter retains all the upside, forgetting the help he got from the government or the banks — after all, banks should be happy they got some of their money back!
“What I am warning against is the uneven sharing of risks and returns in enterprise, against all contractual norms established the world over — where promoters have a class of ‘super’ equity which retains all the upside in good times and very little of the downside in bad times,” Dr. Rajan said.
Dr. Rajan acknowledged that there was a growing restlessness in the society about such reckless behaviour of corporates.
