Millennium Post

‘Defaulting industrialists are freeloaders on hard-working masses’

Rajan also said it is 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.

The comments come in the backdrop of many public sector banks facing huge amounts of bad loans, mostly given to some big corporates while recovery process has been hanging fire in many such cases for months together.

Asserting that he is not against risk-taking, Rajan said in cases of any stress, the promoter threatens 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,’ Rajan said while delivering the third Verghese Kurien lecture at Institute of Rural Management here.

In scathing remarks on the misuse of the system by the large borrowers, Rajan, who has earlier written a book titled Saving Capitalism from the Capitalists, 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,’ the academic-turned-central banker said.

Among various cases, the Rs 7,000-crore debt of Kingfisher Airlines has gone bad and total NPAs in the banking system coupled with restructured loans have crossed 10.4 per cent mark in the first half of this fiscal.

Rajan acknowledged that there is a growing restlessness in the society about such reckless behaviour of corporates. On public perception that big borrowers are getting away due to ‘sweet deals’ between the promoters and the bankers, Rajan sought to defend the lenders, saying they are rendered ‘helpless’ while dealing with a large and influential promoter having many resources at command.

‘The promoter enjoys riskless capitalism...When some businessmen enjoy a privileged existence, risking other people’s money but never their own, the public and their representatives get angry,’ Rajan said.

Rajan also said that RBI is ready to give banks more flexibility in restructuring of stressed loans if it facilitates recovery of stalled projects.

‘The RBI is exploring ways to allow banks more flexibility in (loan) restructuring. This is a risk we are prepared to take if it allows more projects to be set on the track to recovery,’ he said. The RBI is ready to give the flexibility as it recognises the fact that it cannot micromanage distressed loans, he said. ‘The RBI (Reserve Bank of India) opposes forbearance which simply pushes problems into the future, while it will allow more flexibility so that problem loans can be dealt with effectively today.’

He said the banks have been asking the RBI for greater flexibility to restructure bad loans so as to align them with the cash flow of projects, and for the ability to take equity so as to get some upside in distressed projects.

An estimated Rs 20 trillion worth of projects are stuck at various stages for want of land, or environmental clearances or other regulatory or public approvals. As of April-June this fiscal, bad loans, including those recast ones, have crossed 10.4 per cent of the total assets.

The RBI as part of its NPA management measures had tightened the loan recast norms, forcing banks to make higher provisions that hit their their bottom lines. From over 9 per cent growth in the pre-2010-2011 period, the economy had slumped to sub-5 per cent growth in the past two fiscals.

Rajan said the demand by the banks was legitimate as they imply a desire to deal more effectively with distress.

Rajan said the regulator has been reluctant to allow lenders this flexibility in the past because it has been misused by many bank management. The governor said a large number of industries were getting together with banks to clamour for regulatory forbearance, as they want the RBI to be 'realistic'.

Rajan said forbearance makes bank balance sheets opaque and they may smell worse to analysts and investors.
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