Ready to be more flexible in loan recast to spur growth: RBI

The RBI is ready to give banks more flexibility in restructuring of stressed loans if it facilitates recovery of stalled projects, Governor Raghuram Rajan today said.

"The RBI is exploring ways to allow banks more flexibility in (loan) restructuring. This is a risk we are prepared to take if it allows more projects to be set on the track to recovery," he said.

The RBI is ready to give the flexibility as it recognises the fact that it cannot micromanage distressed loans, he said.

The Governor was delivering the third Dr Verghese Kurien Memorial Lecture here.
"The RBI (Reserve Bank of India) opposes forbearance which simply pushes problems into the future, while it will allow more flexibility so that problem loans can be dealt with effectively today."

He said the banks have been asking the RBI for greater flexibility to restructure bad loans so as to align them with the cash flow of projects, and for the ability to take equity so as to get some upside in distressed projects.

An estimated Rs 20 trillion worth of projects are stuck at various stages for want of land, or environmental clearances or other regulatory or public approvals.

As of April-June this fiscal, bad loans, including those recast ones, have crossed 10.4 per cent of the total assets.

The RBI as part of its NPA management measures had tightened the loan recast norms, forcing banks to make higher provisions that hit their their bottom lines.

From over 9 per cent growth in the pre-2010-2011 period, the economy had slumped to sub-5 per cent growth in the past two fiscals.

Rajan said the demand by the banks was legitimate as they imply a desire to deal more effectively with distress.

Rajan said the regulator has been reluctant to allow lenders this flexibility in the past because it has been misused by many bank management.

The Governor said a large number of industries were getting together with banks to clamour for regulatory forbearance, as they want the RBI to be 'realistic'.

Rajan said forbearance makes bank balance sheets opaque and 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 quickly and deal with it, he noted.
"So regulatory forbearance, which is an euphemism for regulators collaborating with banks to hide problems and push them into the future, is a bad idea."

Eventually, when the hidden bad loans cannot be disguised any more, the hit to the bank's income and balance sheet is larger and unexpected, the Governor said.

A bad balance sheet could trigger anxiety among investors about the state of a bank, and in the case of public sector lenders, leave a bigger hole for the Government to fill, he warned.

"These are yet more reasons to end forbearance. Or to put differently, forbearance is ostrich-like behaviour, hoping the problem will go away. It is not realism but naivet, for the lesson from across the world is that the problems only get worse as one buries one's head in the sand."

Rajan, however, also said the RBI will be watchful to prevent misuse of flexibility and will be severe in dealing with such cases.