RBI Governor Against Artificial Fixing Of Bad Debts

Financial Express-06 April 2014

Raghuram Rajan's hard talk to banks: Stop looking for artificial fixes on bad loans-

RBI governor Raghuram Rajan on Friday asked banks to stop looking for ‘artificial fixes’ in dealing with bad loans and make efforts to ‘fix things up the right way’.

Postponing recognition is not forbearance, he said, referring to banks that had approached RBI to consider treating bad loans with forbearance and postpone recognising these as bad loans.

Rajan said the focus must be on treating performing assets. “I think when we do that, we clean up our balance sheets; the markets will (then) be willing to provide finance to institutions that had these balance sheets and, thereby, create a space in financing. So, let’s not try to find artificial fixes. Let’s go about fixing it the right way,” he said.

“Because I am not telling our banker friends who are working very hard at this point to deal with some of these problems and put the banks back on track. I think the time will tell what distinguishes the men from the boys and women from the girls and the truly good bankers will figure out ways to put their balance sheets back on track, put their banks back on track.”

He said it was a shame that so many people in the country did not have access to banking. “There has to be a way around this. We have to give people good savings products, We have to give people good investment products. Looking inwards, we have to look at what regulations make sense and what don’t make sense,” he said.

Raghuram Rajan's fight against loan defaulters faces first test; SBI-led consortium moves to take control of Sai InfoSystem

Sangita Mehta, ET Bureau | 17 Feb, 2014, 04.13AM IST 

MUMBAI: A key element of Reserve Bank of India governor Raghuram Rajan's plan to cleanse the Indian banking system of bad loans is likely to be tested shortly as lenders take management control of Sai InfoSystem, the biggest defaulter in the information technology sector.

The move, which might otherwise have been tangled in legal issues, has been made easier because promoter Sunil Kakkad is untraceable. A consortium of banks led by the State Bank of India has hired Alvarez & Marsal, a top US firm that specialises in recovery from defaults and supplies management to companies in distress.

State Bank of India, IDBI Bank,Allahabad Bank, IDBI Bank,Corporation Bank% and State Bank of Bikaner & Jaipur have lent close to Rs 1,200 crore to the Gujarat-based company whose promoter has been absconding since June 2013. All banks have classified the account as a non-performing loan—one where the borrower has stopped paying dues—and classified the promoter as a wilful defaulter.

"The mandate to Alvarez & Marsal is to make maximum possible recovery either by selling assets or revive the unit by bringing professionals on board, or a combination of both," said a senior executive at one of the banks with a large exposure to the company.

Alvarez & Marsal declined to comment on the development, while officials from Sai InfoSystem could not be reached. Two officials from government-owned banks confirmed the development but didn't want to be named.

Rajan has called on bankers to change managements at defaulting companies. "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise," he had said on September 5 when he took charge as governor, outlining his strategy to restore banks' loan books to health.

FM P Chidambaram and other top government officials have also raised alarm over rising bad debt and said promoters need to be held accountable. Bad loans, most of them at state-owned lenders, rose 38 per cent to Rs 1.28 lakh crore as of September 2013 over the year earlier.

Sai InfoSystem, which has 1,400-1,500 employees, collapsed after bidding aggressively for big-ticket technology mandates from government entities such as Bharat Sanchar Nigam and Brihanmumbai Municipal Corporation and failed to deliver on time.

According to media reports, the promoters are in the US, and employees haven't been paid salaries since June last. The development at Sai InfoSystem is reminiscent of what tookplace at Rajendra Steel in the mid-1990s.

The promoter, the Batras, left the country after realising they would be unable to service debt after expanding aggressively. It took banks 10 years to recover some of the loans by selling moveable properties.

Alvarez & Marsal, with 40 offices across the world, is a turnaround and restructuring specialist with revival mandates such as those of investment banker Lehman Brothers and accounting firm Arthur Andersen.

Raghuram Rajan warns bankers, 'can put lipstick on a pig, but it doesn't become a princess'

PTI | Mumbai | Updated: Nov 16 2013, 10:39 IST

Rising NPAs or bad loans have been a concern
 to both RBI and government.

Reserve Bank of India (RBI) Governor Raghuram Rajan today warned banks against dressing up bad loans and creating bigger problems for future, by drawing a symoblic comparison that one "can put lipstick on a pig, but it doesn't become a princess".

"Restructuring is a legitimate attempt to deal with changes that have happened, but ever-greening is trying to ignore the problem and taper over for later period and thus create large problems in future. Clearly, an important distinction we need to draw," the RBI chief told bankers here this evening at a banking summit.

"You can put lipstick on a pig but it doesn't become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem than recognising it is to be avoided," Rajan said.

Ever-greening is when you are trying to hide the problem and restructuring is when you are trying to deal with a problem where the original zone doesn't quite correspond to the altered circumstances, he said.

Stating that banks should focus more on getting assets back on track and stop meddling with accounts, he said, "One has to be very clear that we shouldn't meddle too much with accounting but focus on getting the troubled asset back on track."

Rising NPAs or bad loans have been a concern to both RBI and government. As of June, the gross NPA of nationalised banks was 3.89 per cent and State Bank Group at 5.50 per cent of total advances.

Finance Minister P Chidambaram, last month, had said the government will monitor 30 NPA accounts of each PSU bank to recover dues. He had also said that the bulk of the NPA was from those who borrowed Rs 1 crore and more.

Promising banks every help, he said, "If there are impediments in doing that (getting back assets), we will look into that as much as we can. We have been talking to a number of stakeholders and we will announce some measures very shortly. We are very focused on measures that will help recognise the problem. On the issue of allowing longer maturity for loans, we are exploring the issue."

He also called for better institutional measures to fight the issue of NPAs, such as good bankruptcy laws where investors in lower grade bonds feel secure.

"We have to ensure that the system recognises financial distress early, takes steps to resolve it, and ensures fair recovery for lenders and investors. We could wish for a more effective judicial process or a better bankruptcy system, but while we await that, we have to improve the functioning of what we have."

"In the next few weeks, we will announce measures to incentivise early recognition, better resolution, and fair recovery of distressed loans. We will focus on putting real assets back to work in their best use," he said.

Stating that they have to deal better with distress, he said the worst way for a bank management with limited tenure to deal with distress is to "extend and pretend" to evergreen the loan, hope it recovers by miracle, or that one's successor has to deal with it.

"The natural incentive for a promoter to deal with distress is to hold on to equity and control despite having no real equity left, and to stand in the way of all efforts to resolve the underlying project while hoping for an Act of God to bail him out. Not all bankers and promoters succumb to these natural incentives but too many do," he concluded.

A recent analysis of NPAs has found that net bad assets of the 40 listed banks have jumped 38 per cent to Rs 1,28,533 crore during the first half of this fiscal, from Rs 93,109 crore at the end of the last fiscal, and is likely to cross Rs 1.5 lakh crore by the end of the fiscal.

Out of the 40 listed banks, 14 banks have reported more than 50 per cent jump in their net NPAs during these six months, a study by NPAsource.com said earlier this week.

Gross NPAs as of the September quarter stood at Rs 2,29,007 crore, 27 per cent higher when compared to Rs 1,79,891 crore as of March quarter for these 40 listed banks. According to the study, gross NPAs of listed banks have doubled since September 2011, while net NPAs have risen by 140 per cent during the same period.

In Q2, top public sector banks like State Bank of India, Bank of Baroda, Punjab National Bank, Central Bank, IDBI Bank and Union Bank have all reported more than 30 per cent rise in net NPAs.

For SBI, net NPAs rose to 2.91 per cent from 2.44 per cent in Q2. However, on a sequential basis, NPAs of the nation's largest lender came down by 39.23 per cent. The rising provisions for bad assets pulled down the net profit of the bank by 35.03 per cent.