Stop protecting defaulting corporate `honchos,’ Rajan tells banks

Reserve Bank governor Raghuram Rajan has called for a change in the mindset of protecting willful defaulters from creditors and that banks should open up on their bad loans, or non-performing assets.

It is no more the case of protecting the gullible poor farmer from the hated moneylender. The large borrower today is not a helpless illiterate peasant and the lender not the typical sahukar but the public sector bank.

''When the large promoter defaults willfully or does not cooperate in repayment to the public sector bank, he robs each one of us taxpayers, even while making it costlier to fund the new investment our economy needs.''

In his harshest criticism of recalcitrant borrowers who believe defaulting on repayment of bank loans is a right, the RBI governor 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 1.5 million of the poorest children in the top private universities of the country, all expenses paid.

The governor said only Rs30,590 crore of bad debt was recovered by banks through the debt recovery tribunals in FY14 from the Rs2,36,600 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. And this has to change if we are to get banks to finance the enormous infrastructure needs and industrial growth that this country aims to attain," Rajan said.

The solution lies in a timely and fair application of existing laws rather than making laws harsher, which would only help entrap the small borrower. The big fish will circumvent any law, the governor said.

Replying to a query on the possibility of RBI to slashing interest rates on 2 December, Rajan said banks should put their houses in order before putting pressure on the central bank.

''We need a change in mind set, where the willful or non-cooperative defaulter is not lionised as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country,'' Rajan said at the Dr Verghese Kurien memorial lecture at the Institute of Rural Management, Anand, Gujarat.

We also need new institutions such as bankruptcy courts and turn-around agents, to augment credit recovery, he said.

The RBI governor warned of an uneven sharing of risks and returns in large Indian companies where promoters retain the upside in good times and have limited accountability in times of crisis.

Promoters of companies have a class of ''super'' equity, which retains all the upside in good times and very little of the downside in bad times, while creditors, typically public sector banks, hold ''junior'' debt and get none of the fat returns in good times while absorbing much of the losses in bad times, Rajan said.

''Why this state of affairs? The most obvious reason is that the system protects the large borrower and his divine right to stay in control,'' Rajan said.

Rajan said the RBI was exploring ways to provide more flexibility to restructure distressed assets. ''Banks want greater flexibility to restructure loans and the ability to take equity so as to get some upside in distressed projects, these are legitimate concerns,'' he said.

"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," he said.

He said banks unwittingly get together with a large number of industries that clamour for regulatory forbearance. They want the RBI to be ''realistic'' and postpone any recognition of bad loans.

''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.''

''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 in recent years across the world is to recognise and flag the problem loans quickly and deal with them. 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.''

''Forbearance allows banks to postpone provisioning for bad loans. So when eventually the hidden bad loans cannot be disguised any more, the hit to the bank's income and balance sheet is larger and more unexpected,'' Rajan pointed out.

''Or put differently, forbearance is ostrich-like behaviour, hoping the problem will go away. It is not realism but naiveté, for the lesson from across the world is that the problems only get worse as one buries one's head in the sand.''

Stating that nobody knows the exact amount of black money stashed away in overseas tax havens, Rajan said lower income tax rates will help curb generation of such illicit funds. "We need to focus on how to stop this practice (of parking money outside the country). We need to bring down tax rates to incentivize the upper class," Rajan said when asked about his views on curbing black money being stashed in tax havens.