Mindset change required to stop lionising wilful defaulters
Lashing out at large borrowers whom he blamed for the sanctity of the debt contract having been continuously eroded in India, Reserve Bank of India (RBI) governor Raghuram Rajan said on Tuesday too many of them “insist on their divine right to stay in control despite their unwillingness to put in new money”.
Too many of them, the governor said, perceived a lender to be not holding a senior debt claim that overrode all others when they were in trouble but a claim that was junior to their equity. “The promoter enjoys risk-less capitalism — even in these times of very slow growth, how many large promoters have lost their homes or have had to curb their lifestyles despite offering personal guarantees to lenders?” he asked.
Rajan was delivering the third Dr Verghese Kurien memorial lecture in Anand, Gujarat. Banks, he said, must insist on more upfront promoter equity and also ensure equity levels are maintained. Calling for a change in mindset, he said defaulting corporates must be treated as freeloaders and chastised.
Ruling out forbearance, which he felt merely postpones problems, he promised banks more flexibility to restructure loans. “This is a risk we are prepared to take if it allows more projects to be set on the track to recovery,” he said. Forbearance for classifying restructured loans as standard will end on April 1, after which which banks must classify them as NPAs (non-performing assets). “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,” said Rajan.
Large promoters, the governor said, succeeded in escaping the rigour of even the bank-friendly Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, with the result that the law was used by lenders to make recoveries only from smaller customers. With a handful of large borrowers holding bank funds hostage, credit has turned costlier to more deserving promoters, Rajan pointed out, illustrating how loans to the power sector were priced at an average 13.7% despite the policy rate being at 8%.
“The promoter who misuses the system ensures that banks then charge a premium for business loans; the credit risk premium of 5.7% is largely compensation banks demand for the risk of default and non-payment. Even comparing the rate on the power sector loan with the average rate available on a home loan of 10.7%, it is obvious that even good power sector firms are paying much more than the average household because of bank worries about whether they will recover loans.
Banks have already written off a massive Rs 1.61 lakh crore or 1.27% of GDP over the last five years. While, some of this will be recovered, the governor believes that given the size of stressed assets in the system, there will be more write-offs to come.
Even the stock of bad loans referred to debt recovery tribunals (DRTs) has fared badly with delays in judgements skewing the process in favour of the promoters. In 2013-14 only 13% of the massive Rs 2,36,600 crore of debt was recovered through DRTs due to delays in cases, Rajan said. Warning that backlogs are only increasing — a four-year wait for new cases to be heard — the governor called for more DRTs to be set up as well as reform the process.