With barely three weeks to go before his term ends, Reserve Bank of India governor Raghuram Rajan on Tuesday again raised the red flag on exuberant lending by banks.
Speaking at the FICCI-IBA annual Global Banking Conference in Mumbai, Rajan said India will have enormous project financing needs in the coming days and hoped that banks will not be “irrationally exuberant” in lending this time. “The focus should move more to improving the operational efficiency of stressed assets and creating the right capital structure so that all stakeholders can benefit,” he said.
The central banker was referring to the indiscriminate lending by banks post 2009 which left companies with unserviceable loans after the global economy stuttered to a halt and also affected banks with an unprecedented bad loans tally. The gross non-performing asset at public sector banks are around Rs 5.76 lakh crore.
On stressed assets, Rajan suggested simultaneous action on two fronts - a creative search for new management teams, including the possible use of public sector firms or private sector agents, as also well-structured performance incentives such as bonuses for meeting cash flow or profit benchmarks and stock options.
The focus on bad loans has been an important task for the outgoing governor who has introduced a number of measures, including early recognition of such loans and providing for them by March 2017, to launching two debt restructuring schemes – Strategic Debt Restructuring and the S4A, to clean-up banks’ balance sheets.
To lower the risks further, Rajan suggested bringing in more in-house expertise to project evaluation, including understanding demand projections for the project’s output, likely competition, and the expertise and reliability of the promoter.
Rajan also pitched for more independence to the Bank Board Bureau. This Bureau was set up by the Modi government to fill in posts of managing directors and CEOs of public sector banks. “To fill out the ranks of middle management that have thinned out by retirements, banks should look for talent with expertise in project evaluation, risk management, and IT, including cyber security. Solutions like persuading courts to allow some campus hire, making bank entrance exams much less onerous to take, with applications, tests, and results, wherever possible, available quickly and online and to have more freedom to hire locally, and pay wages commensurate with the local labour market should be considered,” said Rajan. “None of these changes are easy, but they are also not impossible,” said the governor who will move back to his teaching job in the US after the expiry of his term on September 3.
Further, authorities like the central bank and the Government should, over the medium term, reduce the differences in regulatory treatment between public sector banks and private sector banks, and more generally, between banks and other financial institutions to encourage effective competition among them. This can be achieved by paying for delivery of mandates and targeting them better towards the truly underserved as also withdrawing preferential treatment, to the extent feasible, at commensurate pace, said Rajan.