Taking a strong stance against wilful defaulters, RBI governor Raghuram Rajan has said that in case of ‘malfeasance’, borrowers should not be allowed to restructure loans with banks.
In such cases, he said, the promoter’s assets should be taken over by financial institutions and sold.
Speaking at an investor gathering organised by Citigroup in New York, Rajan also said that if projects are reasonably viable and have turned into non-performing assets (NPAs) due to clearance issues, the loans should be restructured. In unviable projects, NPAs should be written off. However, as part of the bankruptcy code, there should be a way for assets to be taken over by other players before true bankruptcy, he added.
The heavy pipeline of corporate debt restructuring in the past couple of years has added to asset quality concerns in the banking system. More than R1 lakh crore in loans are expected to be restructured with the corporate debt restructuring (CDR) cell this year against R70,000 crore in 2012.
Meanwhile, addressing macro-economic concerns, Rajan reiterated to investors that inflation will remain the key focus of monetary policy. He, however, highlighted the existence of high positive real rates for producers (using WPI) and negative real rates for savers (using CPI). This, coupled with dis-inflationary factors at play like the negative output gap and good harvest, makes it important for the RBI to manage inflation in a way that doesn’t kill growth, said the RBI governor.
Rajan admitted that the economy had slowed to below 5% after averaging 8% growth in the FY02-12 period, largely as a result of domestic factors such as institutional weakness and the withdrawal of fiscal stimulus. One-third of the slowdown is attributable to global factors, he said.
Rajan noted that the country needs to take the US Federal Reserve’s move to taper monetary stimulus seriously. However, he added that the country is in a much better position to deal with the tapering as the current account deficit is likely to narrow substantially to under 3% of the GDP. The $34 billion raised in recent months through the foreign currency non-resident deposit (FCNR) and tier-I fundraising windows has also helped create a buffer. While Rajan gave no indication of a progress in efforts to include India in the global bond indices, he noted that making rupee bonds eligible for Euroclear’s settlement system was an option.
He also pointed out to investors that a lot has been done on the