Raghuram Rajan said regulatory forbearance, where RBI makes it easy for banks to extend and pretend a loan that is not stressed, is not a solution.
Reserve Bank of India (RBI) Governor Raghuram Rajan today came down heavily on promoters of some large distressed companies taking advantage of banks’ fear of an asset turning dud and making unjustified demands.
“Some large promoters take advantage of bankers fear about assets turning non-performing to extract unwarranted concessions, without any sacrifice in the value of their stake,” Rajan wrote in his Overview on the 2014-15 Annual Report of the central bank release today.
The Reserve Bank follows a July-July financial year.
He said in dealing with stressed assets, RBI has been focused on getting the underlying real projects back on track but there are a number of impediments.
“First, the stigma as well as the provisioning (and the associated fall in profitability) attached to a loan being labelled non-performing makes banks eager to avoid the label,” he said.
In a few cases, bankers ignore the reality that existing loans will have to be written down because of the changed situation since they were sanctioned, which includes extensive delays, cost-overruns, and overoptimistic demand projections.
The Governor said regulatory forbearance, where RBI makes it easy for banks to extend and pretend a loan that is not stressed, is not a solution.
Since no other stake-holder, such as the promoter, tariff authorities and tax authorities, contributes to resolution, the real project limps along becoming increasingly unviable, he said.
Rajan said analysts grow increasingly suspicious of bank balance sheets and the growing volume of restructured assets.
The judicial process, despite a variety of creditor-friendly bills like the Sarfaesi Act, further tends to hamper the ability of creditors to collect their just dues from influential promoters.