In a bid to divert attention from Vijay Mallya’s massive default on bank loans that created outrage from the Opposition and the media, Finance Minister Arun Jaitley and Reserve Bank of India (RBI) Governor Raghuram Rajan on Saturday cautioned against exaggerating the bad loan crisis lest it hampers the entire lending operations and economic growth.
“We don’t want to create a situation where we overstate the crisis and in the process the whole activity of lending for growth itself starts suffering because people become extraordinarily defensive; we don’t want to reach that situation. It is that limited category where there is some kind of a prima facie misconduct or misdemeanour which has taken place by the individual. It is those areas which will be looked into differently,” Jaitley said, while speaking to the media after RBI’s board meeting where the central bank chief Rajan was also present.
Echoing similar views, Rajan said, “We have to be careful as we go forward. On one hand criminal actions are penalised. But at the same time, we don’t indulge in a broad fishing expedition which then becomes a reason for banks to get worried about giving loans which will hamper the recovery. It will also hamper the absolutely important investment in infrastructure that have to take place.”
“So as a country, as a system, we have to draw that balance very carefully and we are hopeful that we can manage that,” he added.
As on December 2015, the bad loan or gross Non Performing Assets (NPAs) of the public sector banks (PSBs) increased from 5.43 per cent as on March 2015 to 7.30 per cent.
Jaitley also expressed hope that the NPA situation, which has been created on account of an overall economic environment and slowdown in certain sectors, would see improvement. “As the revival of those sectors takes place, you will certainly find cleaning up of balance sheets, which also takes place because over the next few quarters they would probably have a possibility of reviving,” he said.
Defining wilful defaulters, Rajan said there is a well-defined process for this and broadly speaking, it may be maneuvers, which strictly speaking are not illegal, but which divert funds away from the project and elsewhere. Now some of these actions may also be illegal.
“We have a process by which people are declared wilful defaulters, we maintain a registry of wilful defaulters and we have strengthened the penalties, if you are a wilful defaulter on your ability to raise money from the system. So I think that process is there,” the RBI Governor said.
The central bank, he added, has put in place process to penalise wilful defaulters, but accepted that there are problems when it comes to implementation. “One of the problems in the past has been difficulty of enacting the full process given the necessity for following certain aspects that judiciary focussed on. Going forward, I hope this process is streamlined,” he said.
However, Rajan added that one of the problem in past has been difficulty of enacting the full process given the necessity for following certain aspects that judiciary focused on. Going forward, Rajan exuded confidence that the process is streamlined so that entities following aberrant practices end up not paying loans and subsequently we get a better system. “So my hope is that some of the attention that has been paid to some of these actions will help streamline the system.”
On rate cut mechanism that will pep up growth in the banking system, Rajan was happy about his powers to decide interest rates being shifted to a broader panel, saying the move was in the interest of the economy. A six-member monetary policy committee (MPC), which will include RBI Governor and three nominees of the Government, will set interest rates to bring consumer or CPI inflation to pre-set targets.
The provisioning for NPAs done by PSBs as on December 2015 stand at Rs1,35,938 crore. State-owned banks wrote off over Rs1.14 lakh crore debt during the last three financial years that was more than the amount written off in the previous nine fiscals. Besides NPA issue, Rajan also highlighted about raising productivity, improving infrastructure and simplifying regulations, which is in the domain of the Government. “The bottom line is that even though Indian trade has been slowing, the slowdown is similar to what has been happening elsewhere, with a significant portion due to a fall in commodity prices and a smaller share due to a fall in trade volumes,” he said.