Rajan Slams Banks for `Hiding’ NPAs

  • In his most hardhitting speech against recalcitrant defaulters, Reserve Bank of India governor Raghuram Rajan has said that the amount written off by banks as bad debts in the last five years would have been enough to fund the education of 15 lakh of the poorest children in the top private universities of the country, all expenses paid.
  • The governor said only Rs 30,590 crore of bad debt was recovered by banks through the debt recovery tribunals in FY14 from the Rs 2,36,600 crore claimed even as cases keep piling up.
  • The sanctity of the debt contract has been continuously eroded in India in recent years, not by the small borrower but by the large borrower.
  • This has to change if we are to get banks to finance the enormous infrastructure needs and industrial growth.
  • The governor has been steadfast in his attack on non-cooperative defaulters.
  • In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money .
  • The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken -the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive.
  • The governor lashed out at banks for joining hands with borrowers in seeking relaxation in classifying some projects as “non-performing assets“.
  • This is short-sighted, especially on the part of the banks.
  • Today, the market does not distinguish much between non-performing loans and restructured loans, preferring to call them both stressed loans and discounting bank value accordingly
  • The governor's statement comes in the wake of analysts reports which have stopped analyzing the quality of a bank's loans on the basis of reported NPAs.
  • Most analysts now measure “stressed assets“ which refer to NPAs and loans where distressed borrowers have been given more time to repay.
  • Mutilating Shakespeare, an NPA by any other name smells as bad!
  • Indeed, because forbearance makes bank balance sheets opaque, they may smell worse to analysts and investors.
  • The fundamental lesson of every situation of banking stress is to recognize and flag the problem loans quickly.
  • So regulatory forbearance, which is a euphemism for regulators collaborating with banks to hide problems and push them into the future, is a bad idea.
  • The expert panel had also recommended increased penalties for smoking in public.Six years ago, India had banned smoking in public places. However, implementation of the law has been weak, experts say .
  • Once the inter-ministerial consultation is over, the draft proposal by the health ministry is likely to be taken up by the Cabinet.
  • The two countries finalized the $1 billion line of credit announced during the PM's visit to Kathmandu in August. This will be utilized for hydropower, irrigation and infrastructural development projects.