Public sector banks will benefit from bad loan clean-up: Rajan

The increased pace of clean-up, coupled with pulling the plug on bad investments much earlier, will help public sector banks (PSBs), going forward, said RBI Governor Raghuram Rajan .

Addressing Assocham members here, Raghuram Rajan also ruled out the possibility of the central bank capitalising public sector banks as suggested in the Economic Survey . “This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, which raises conflicts of interest.”

He said it is better that the RBI pays the government maximum dividend, and retain enough surplus that is consistent with good central bank risk-management practices. “Indeed, this is what we do, and in the last three years we have paid all our surplus to the government,” he pointed out.

Rajan, who will be stepping down in September, said the slowdown in credit growth is largely due to the stress in pubic sector banks and not due to high interest rates. Numbers point out that from 2014 till date, credit growth of private banks have averaged about 25 per cent, whereas in the same timeframe, credit growth for public sector banks has come down to less than 10 per cent. A similar pattern was seen with regard to housing loans as well as credit to micro/small enterprises and the agriculture sector.

“We absolutely need to get public sector banks back into lending to industry and infrastructure, else credit and growth will suffer as the economy picks up,” he pointed out.

However, he added that measures taken by PSBs in the form of higher provisioning for non-performing assets (NPAs) as well as change in the culture of these banks have helped to a large extent.

Rajan also pointed to the dichotomy faced by many of them due to the system. “In a lot of cases, there is over-lending to large businesses and in other cases there is no lending,” he said. He attributed this problem to short tenures of managers and absence of sound loan management systems. “A lot of times, the scrutiny on small businesses was much higher than larger ones,” he said

According to S Subramanian, Chairman, African Centre for Mobile Financial Inclusion, and a former RBI executive, continuing to lend to projects which are not viable makes no sense. “Once the project is non-viable, the plug has to be pulled fast,” he said.

Rajan also pointed out that the current mechanisms of monitoring and debt collection were poor.

“Deficiencies in evaluation can be somewhat compensated for by careful post-lending monitoring, including careful documentation and perfection of collateral, as well as ensuring assets backing promoter guarantees are registered and tracked. Unfortunately, too many projects were left weakly monitored, even as costs increased,” he said.

“On the other hand, as a project started going bad, private banks were sometimes more agile by getting additional collateral from the promoter, or getting repaid, even while public sector banks continued supporting projects with fresh loans. Promoters astutely stopped infusing equity, and sometimes even stopped putting in effort, knowing the project was unlikely to repay given the debt overhang,” he said.

The government has proposed legislative reforms to the judicial process, including speeding up the functioning of the debt recovery tribunals, which now await Parliament nod.