Rajan makes the right points, now to act on them
RBI Governor Raghuram Rajan got it completely right when, while talking of how large borrowers were taking advantage of the inefficiencies in the system to not repay banks, he said this free ride was at the expense of both the banks as well as other borrowers. Had borrowers been more conscientious, the cost of loans would have been lower for everyone. Instead, with lenders pencilling in risks for non-payments and defaults, loan rates are higher than they should be—as Rajan pointed out, loans to the power sector are priced at 13.7% even though the policy rate is just 8%, implying a high credit risk premium of 5.7%. While promoters may have behaved with impunity, with political backing in most cases, it is also true that banks needed to be more circumspect while disbursing credit; many of the accounts that have ended up in the CDR (corporate debt restructuring) cell might not have needed to be there had banks been more diligent while assessing risk. Some of the sums lent, in absolute amounts, are disproportionate to the turnover and profits of the companies.
Indeed, RBI itself needed to have tightened prudential norms for bank exposures to groups and individuals—to match global standards—several years ago. While it is easy to say that banks could still have restricted loans to certain groups even while RBI allowed higher exposure levels, the fact is PSU bank chiefs are susceptible to political pressure. Which is why, had RBI lowered prudential limits, bankers could have used this as a legitimate shield against political pressure. Also, in the past the central bank has agreed to forbearance for certain stressed assets—Air India, for example. Making exceptions is not a good idea, even if the assets belong to the government. In the past, RBI also allowed a restructured asset to be classified as a standard asset, an attempt to camouflage an NPA (non-performing asset) as a good one. As the Governor pointed out, nobody is fooled by this, and the market believes most restructured loans are NPAs. This, of course, will change from next April when a restructured loan will have to be classified as an NPA. Meanwhile, the Governor has ruled out forbearance while promising lenders a little flexibility on restructuring. While RBI is now beginning to do its bit, bankers must insist on more guarantees and collateral, and must not hesitate to declare a borrower a wilful defaulter; indeed, one would have expected many more promoters to have been classified wilful defaulters after Vijay Mallya. It is true the judicial system is unhelpful making recoveries slow and small, and hopefully the government will act on Rajan’s suggestions including the shortage of appellate tribunals for debt recovery. But with an RBI Governor who bats for them, this is the time for banks to work towards cleaning up the system.