Reserve Bank of India Governor Raghuram Rajan on Tuesday hoped that banks will not be irrationally exuberant in lending at a time when the country will have enormous project financing needs in the coming days.

Speaking at the FICCI-IBA banking summit, Rajan observed that first the focus of banks should move more towards improving the operational efficiency of stressed assets, and creating the right capital structure so that all stakeholders could benefit.

Toward this, he 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/profit benchmarks and stock options.

To lower the risks in lending further, Rajan recommended bringing in more in-house expertise for project evaluation, including understanding demand projections for the project’s output, likely competition, and the expertise and reliability of the promoter.

He also felt that real risks should be mitigated wherever possible, and wherever not, shared contractually between the promoter and financiers, or a transparent arbitration system agreed upon.

Financiers should put in a robust system of project monitoring and appraisal.

“It only required a stronger marriage between information technology and financial engineering with an important role for practical industry knowledge and incentive design,” he said.

He also suggested an incentive structure for bankers so that they structure and monitor loans carefully, and get significant rewards, including promotions, if loans worked out was necessary, he added.

The Governor said to fill out the ranks of middle management that have thinned out by retirements, public sector banks should look for talent with expertise in project evaluation, risk management, and IT, including cyber security.

He observed that 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.

Further, solutions like increased emphasis on performance evaluation, including identifying low performers with the intent of helping them improve, rewards like Employee Stock Ownership Plans (ESOPs) that give all employees a stake in the future of the bank might also be helpful.

"None of these changes are easy, but they are also not impossible," Rajan emphasised.

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