RBI can offer more flexibility in loan restructuring

Talking tough on wilful loan defaulters, RBI Governor Raghuram Rajan said it is exploring ways to provide more flexibility to restructure distressed assets.

“Banks have also been asking the regulator for greater flexibility to restructure loans so as to align them with the project’s cash flows, and for the ability to take equity so as to get some upside in distressed projects. These are more legitimate requests as they imply a desire to deal more effectively with distress,” Rajan said in a speech during the third Dr. Verghese Kurien lecture at the Institute of Rural Management in Gujarat.

Also, the government is working on a much needed new bankruptcy law, which if properly structured, will help bring clarity, predictability, and fairness to the restructuring process.

He said the reluctance to afford banks this flexibility in the past was due to its misuse by bank management. “Nevertheless, recognising that it cannot micromanage the resolution of distress, the RBI is exploring ways to allow banks more flexibility in restructuring. This is a risk we are prepared to take if it allows more projects to be set on the track to recovery.”

Though, Rajan added that banks need to react more quickly and in a concerted way to borrower distress. He said the longer the delay in dealing with the borrower’s financial distress, the greater is the loss in enterprise value. Some banks are more agile (and have better lawyers), so the promoter continues servicing them while defaulting on other banks.

The system also needs professional turn-around agents who can step in the place of promoters and the RBI is open to more firms applying for licences as Asset Reconstruction Companies.

Speaking about the global trend on defaulters’ behaviour, Rajan said, “When a large borrower defaults, he is contrite and desperate to show that the lender should continue to trust him with management of the enterprise. In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money.”

Share risks

The RBI chief warned against the uneven sharing of risk and returns in an enterprise where promoters have a class of “super” equity which retains all the upside in good times and very little of the downside in bad times, while creditors, mostly public sector banks, hold “junior” debt and get none of the fat returns in good times while absorbing much of the losses in bad times.

He said many projects are in trouble today because they were structured up front with too little equity, sometimes borrowed by the promoter from elsewhere. And some promoters find ways to take out the equity as soon as the project gets going, so there really is no cushion when bad times hit.

“Lenders should insist on more real equity up front, and monitor the project closely to ensure it stays in. Promoters should not try and finance mega projects with tiny slivers of equity. We also need to encourage more institutional investors, who have the wherewithal to monitor promoters, to bring equity capital into projects.

Make legal process more effective

On other solutions, Rajan said the government’s plan to expand the number of DRTs and DRATs (Debt Recovery Appellate Tribunals) is timely, and will be most effective if also accompanied by an expansion in facilities, trained personnel, and electronic filing and tracking of cases, as suggested by the Supreme Court.

Some monetary incentives to tribunals for bringing down the average duration of cases, limit on the number of stays each party can ask for, ask borrowers to pay deposits and as suggested by the Supreme Court, Constitutional Courts should entertain fewer appeals and make it costlier to challenge orders of DRT and DRAT, among others.

Highlighting that a large number of industries are getting together with banks to clamour for regulatory forbearance today, he said that forbearance only pushes the problem into future and eventually the hidden bad loans will hit the bank’s income and balance sheet larger and more unexpected.

The amount recovered by banks with the help of Debts Recovery Tribunals (DRTs) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, is both meagre and long delayed.

The amount recovered in 2013-14 under DRTs was Rs 30,590 crore while the outstanding value of debt sought to be recovered was a huge Rs 236,600 crore. Thus recovery was only 13 per cent of the amount at stake. In addition, the backlogs and delays are growing, not coming down. While, this one-way bet is paid by the hard working savers and taxpayers of this country, he reasoned.

“As just one measure, the total write-offs of loans made by the commercial banks in the last five years is Rs 161,018 crore, which is 1.27 per cent of GDP… which would have allowed 1.5 million of the poorest children to get a full university degree from the top private universities in the country, all expenses paid,” Rajan added.

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