Indian industry no longer an infant that needed to be mollycoddled, says Raghuram Rajan

Written by fe Bureau | Mumbai | Updated: Nov 16 2013, 16:02pm hrs
Raghuram RajanRBI Governor Raghuram Rajan during an address at the Bancon 2013 Conferance in Mumbai. (PTI)
Reserve Bank of India (RBI) governor Raghuram Rajan on Friday asserted that Indian industry did not need to be treated with kid gloves, expressing concern the country seemed to be reverting to a dialogue of protection and subsidies that we left behind long ago.

Addressing Bancon 2013, the governor pointed out that industry was no longer an infant that needed to be mollycoddled. 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. We must remember that one domestic producers advantage from protectionist profits is paid for by the consumer, or shows up as another domestic producers cost disadvantage. Raghuram Rajan said.

Calling for a a strong bankruptcy law to aid recovery of loans by banks and asserting that a deeper corporate bond market was needed to address long-term financing needs, given how much of the toxic assets were in the infrastructure sector, the governor noted that the short tenures of bank chiefs has been part of the problem. The natural and 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 a miracle, or that ones successor has to deal with it, he said.

Raghuram Rajan called for early recognition of financial distress, saying the RBI will incentivise better resolution of distressed loans. In the next few weeks, we announce measures to incentivise early recognition, better resolution and fair recovery of distressed loans, Raghuram Rajan said on Friday at the annual banking summit organised by the Indian Banks Association.

Cautioning banks from allowing the weakness in assets to fester or from postponing the problem by evergreening, the governor said, You can put lipstick on a pig but it doesnt become a princess.

While restructuring of loans was a legitimate exercise that helped corporates and banks, changing the terms of the loan only to avoid provisioning, the governor said, must be avoided. I think one has to be very clear that we shouldnt meddle too much with accounting but focus on bringing the asset back on track, and if there are impediments in doing that, we will look into that as much as we can, Raghuram Rajan said.

The central bank will implement several recommendations of its internal committee on deepening and broadening the bond market over the next few weeks, Raghuram Rajan said. A deep and liquid market will help banks reduce exchange rate and interest rate risk and also allow companies to raise funds through equity.

The issue of distressed assets has been a cause for concern with both slippages and restructuring going up in the last couple of years.

A sluggish economy, an acute shortage of raw materials and policy paralysis have left corporate finances weaker, forcing several of them to approach banks for more lenient repayment terms. While non-performing assets have already hit 4% of total assets, loan recast requests worth approximately Rs 1 lakh crore are expected to be placed before the corporate debt restructuring (CDR) cell this year. Between April and October 2013, the cell has approved Rs 43,000 crore for recast. As FE reported recently, nearly 20% of the amounts restructured via the CDR route could go bad.

Raghuram Rajan said that the RBI is very focused on controlling inflation as high inflation affects all segments of the society. The governor said that a weak economy will itself bring down inflationary pressures and the RBI would take the necessary steps to bring it down further. We are going to look at data, understand where we are and take further action on that basis, he said.

The governor said that the central bank has interest rates as the only tool to address inflation and that it is a blunt tool to be used carefully. Indias wholesale price-based inflation rose to an eight-month high of 7% in October. Retail inflation too showed a rise to 10.07% from 9.84% in September, indicating that inflationary pressures are persisting.

Raghuram Rajannoted that the 2% growth in industrial output does not augur well for an economy on the recovery path. However, he hoped that higher agricultural output both kharif and rabi and improving exports could provide a fillip to growth.

Banks have been accused of evergreening loans by changing the repayment structure just to avoid classifying the asset as a non-performing one, even as promoters have been blamed for wilfully defaulting at times. The government and the regulator in recent months have asked bankers to get tough on defaulters and only entertain genuine cases of restructuring.