Rajan’s view on NPAs

| Updated on September 12, 2018 Published on September 12, 2018


This has reference to ‘Rajan traces NPA mess to banks’ excesses in 2006-08’ (September 12). The present mess is the result of a combination of commissions and omissions on the part of the Central government, the RBI and the commercial banks concerned. While one agrees with the former RBI Governor that the substantial credit growth in the books of banks in 2006-08 was the start of the present bad loans position, a few blunders since then by all concerned have pushed the problem beyond manageable levels.

To insulate the Indian economy from the global financial crisis in 2008, in the name of ‘financial stimulus’ the RBI introduced CDR (corporate debt restructuring) and permitted commercial banks to restructure stressed assets while retaining them as standard asset. This helped the banks to save on provisions but the issue of accounting for accrued interest beyond 90 days remained. The banks innovated and included the future interest obligations as part of fresh loans in the restructured packages. By servicing interests with loan debits, not only the loan outstanding went up for the borrowers, the profit and, thereby, the reserves of the respective banks also grew substantially in the period 2008-2015.

Though RBI initiated lot of measures like revised norms for sale to ARCs, SDR, S4A, and 5/25, among others, to address the issue of stressed assets, it continued to permit banks to book accrued interest in respect of stressed standard assets by debiting the loan accounts till March 2015.

The banks also, in the absence of a resolution, used the various schemes for deferring NPA classification and provisions therein. When the entire banking system was about to collapse, Asset Quality Review was conducted, IBC was implemented and the real picture emerged.

V Viswanathan


Instead of viewing the observations of Raghuram Rajan on banks’ NPAs in the right perspective, trading of words and blaming him for the predicament of banks are uncalled for.

His warning signals on the impending problems in micro, small and medium enterprises (MSMEs ) should be taken forward for initiating steps to set right the situation. He is globally acknowledged for having warned about an impending financial crisis before 2008.

Similarly, his present opinion should be taken seriously. The underlying fact and common thread between big ticket loans failure and MSME problems can be traced to undue interest and enthusiasm shown by bankers to lend fast and repent later.

RS Raghavan


Affordable public transport

The four-part series on urban mobility is a seminal articulation of a crucial subject that defines liveability of cities. However, the affordability aspect of public transport seems to have been missed. One of the reasons for the phenomenal growth of two-wheeler commuting is that it is cheaper than going by bus. Even a one-person ride on a bike is far cheaper than a bus ride. The cost is halved if two persons travel.

Add to it zero wait-time and first-mile and last-mile connectivity. Any attempt to raise bus fares has met with declining ridership. City bus services and other public transit modes need to provide substantial subsidies, funded by, among other ways, higher parking charges for private vehicles. Also, a small cess on every litre of motor fuel sold in the city can fund part of the subsidy.

V Vijaykumar


Monnet Ispat settlement

This is with reference to ‘Monnet Ispat shares to return under new owners’ (September 12). It is really painful to note that the non-promoter shareholders of Monnet Ispat would get just one-third of their holdings, consequent to settlement arrived at under Insolvency and Bankruptcy Code. Besides the sacrifice of nearly two-thirds value by retail shareholders, bankers had to stomach a hair-cut of 72 per cent of the money due to them. In hindsight, it can be said that the project appraisal was faulty and the lenders did not apply their mind.

Vazuthur Raghavan


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Published on September 12, 2018

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