RBI to overhaul debt recovery process: Rajan

BS :Manojit Saha  |  Mumbai  November 16, 2013 Last Updated at 00:57 IST

Measures in next few weeks 
to ensure fair recovery of distressed loans; 
Rajan keeps market guessing on rate cut


The Reserve Bank of India (RBI) is to soon announce measures to ensure fair recovery for bankers and investors, and to punish those trying to milk the system.

“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,” said Raghuram Rajan, governor of the central bank, at the annual banking event, BANCON, here on Friday.

Rajan blamed promoters of companies for taking undue advantage of the debt restructuring process. “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 said.

He didn’t spare bankers, either. “The natural, and 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,” Rajan said. He added, while answering a question from the audience, that the practice of transfer of top management among public sector banks (PSBs) could be reviewed.

His comments come when banks face problems on the asset quality front and PSBs are the worst hit. State-run banks have seen more slippages in the past couple of years and have restructured more assets than their private and foreign counterparts. Debt recast by government banks has also raised questions on whether restructuring was done only to defer slippage to the non-performing category.

Rajan, who has raised policy interest rates twice since taking office in September, said no single data point would determine RBI’s next move on curtailing high inflation in a weak economy.

Wholesale Price Index-based inflation hit an eight-month high of seven per cent in October, driven by costlier fuel and manufactured goods, data on Thursday showed, raising the prospect of a further rate increase.

Rajan said demand needed to be reduced, without having severe effects on investment and supply. “This is a balancing act, which requires the Reserve Bank to act firmly so that the economy is disinflating, even while allowing the weak economy more time than one would normally allow for it to reach a comfortable level of inflation,” he said.

“The weak state of the economy, as well as the good kharif (summer) and rabi (winter) harvest, will generate disinflationary forces that will help. We await data to see how these forces are playing out.”

Which is when he added that “no single data point or number will determine our next move”.

While lauding PSBs’ efforts to digitise operations, enabling them to implement core banking solutions, the governor said the lenders must not rest on their laurels. “In the coming months, we will discuss with stakeholders in PSBs about what needs to be done to further improve their stability, efficiency and productivity,” he said.

The governor also emphasised the need to deepen financial markets and introduce new products to help banks de-risk their balance sheet. “Liquid markets will help banks offload risks they should not bear, such as interest rate or exchange risk. These will also allow banks to sell assets that they have no comparative advantage in holding, such as long-term loans to completed infrastructure projects, better held by infrastructure funds, pension funds, and insurance companies.” Rajan said liquid markets would also help promoters raise equity to absorb the risks that banks otherwise end in absorbing.

In the coming weeks, RBI plans to roll out more recommendations of the Gandhi committee report to improve the liquidity and depth of the government securities market. “We will then turn to money markets and corporate debt markets. We will introduce new variants of interest rate futures and products like inflation-indexed certificates, and work to improve liquidity in derivative markets,” Rajan said.

Rajan warns against return of licence permit raj

Raghuram Rajan sounded a note caution on the government’s industrial policies are concerned. He reminded New Delhi’s policy makers that the country’s industrial sector had come a long way and there was no need to enter free-trade free-trade agreements that give foreign manufacturers an undue advantage.

“Echoes of industrial planning seem to be heard once again in the corridors of power. I am worried because we seem to be reverting to a dialogue of protection and subsidies that we left behind long ago. Our industrial sector is no longer an infant that needs to be molly-coddled. While we should not enter into free-trade agreements that give foreign manufacturers an undue advantage, that is no reason for us to now respond by giving domestic manufacturers protection,” he said.


According to Rajan, instead of targeting specific industries for governmental attention, which risks bringing back all the baggage of the License Permit Raj that the country has left behind, focus should be on improving the conditions for growth for all.