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.