Bad Loans, A Pain For Lending-Rajan

BENGALURU: RBI governor Raghuram Rajan revealed lending figures to illustrate that the bad loan issue in public sector banks had come to topsy-turvy before the RBI could drive banks to tidy up their balance sheets.

RBI governor has come out with lending numbers to show that the bad loan problem in public sector banks had come to a head long before the RBI forced banks to. The governor said that big fishes with quixotic loans wangled to stay around by betting one bank against the other, exploiting banks fears of bad loans to bolster higher debt.

Rajan, during a presentation to businessmen in Assocham event at Bengaluru, said that since early 2014, lending by public sector banks have dropped aggressively. During the last 24 months, private sector banks have remained to rise their lending by more than 20% while PSBs, under pressure, were trying to reduce their coverage to sectors like non-food, industry, MSMEs and agriculture with their loan disbursement increasing at short rates–averaging out to 5-10%.

Meantime, during this timeframe, lending of personal loans and housing loans by PSBs have increased around 20%, coming in par with private banks. PSBs throw in around 70% of the whole borrowing in the country. With reference to this data, Rajan mentioned that the reason behind banks acts is the bad loans and reduction in exposure to sectors. As the governor, Rajan’s primary task was to make banks to report all loans over Rs 5 crore and make an electronic database that displayed if the loan was sound or an NPA according to the bank that had presented the details. The next move was to gather all the lenders and get them to the worried borrower on a single platform and devise the future strategy. The RBI also withdrew powers of a bank to reorganize projects without calling them NPAs.

"Everyone — banker, promoter, investors, and government officials — often push for such a strategy because it beats down the problem down the road, hopefully for someone else to handle. The shortcoming is that when growth does not turn around, the bad loan problem is larger, and dealing with it is trickier. It is when the bad loan problem is permitted to mount up through forbearance or non-recognition that regulators have the complex task of bringing the system back on track. That is the problem we have had to deal with at the RBI," said Rajan.

Rajan expressed that PSBs were not thorough and careful enough by themselves and often relied on the due diligence done by investment bankers hired by promoters. Rajan also requested raising the tenure of bank managers. "The real issue is the short tenure of management, which implies they are defiant to recognize losses at once and close down the nonviable project and more prone to force the problem for the successor to handle," Rajan said, adding that such instances lead to over lending or ever greening of unviable projects.

Amending the governance of banks, quickening the debt recovery process through DRT and bankruptcy law will be highly valuable in decluttering the banks' balance sheets, Rajan said.

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