Measures to Improve Joint Lenders' Forum Functioning on Anvil: Rajan

Mumbai: As criticism about the misuse of the recently-formed joint lenders' forum (JLF) mounts, Reserve Bank of India Governor Raghuram Rajan has said the central bank will shortly announce some measures that should improve the functioning of the forum.

"We have discussed the experience with the JLF with banks and we will shortly announce some measures that should improve their functioning," Mr Rajan told the annual banker conference Fibac here, even as he defended the mechanism over the CDR (corporate debt restructuring) cell.

Defending the scrapping of the CDR cell, Mr Rajan said the regulatory forbearance, where the RBI makes it easy for banks to "extend and pretend", is not a solution, as stressed loan ever-greening will only further confound the matters for the lenders.

Regulatory forbearance is not a solution since no other stakeholder, such as the promoter, tariff authorities and tax authorities, contributes to resolution, and the real project limps along becoming increasingly unviable, he said, adding, "Forbearance is also a disservice to the banks."

To deal both with project paralysis and unfair distribution of losses, the RBI ended the forbearance on restructured loans. Effective last August, restructured loans are being classified as non-performing loans. And thus, if a loan is identified as overdue for over 60 days, all lenders have to come together in a joint lenders' forum to see how the underlying problems can be fixed.

Noting that in dealing with stressed assets, the RBI has been focused on getting the underlying real project back on track, he admitted that there are issues for banking in immediately labelling a troubled account as NPA (non-performing asset).

Mentioning clearly the plight of the state-run power distribution companies as the clear example of the regulatory forbearance being misused, Mr Rajan recalled that "in 2012, a number of states signed up to a financial restructuring plan (FRP) with banks and the Centre, based on which RBI permitted restructured loans to discoms (distribution companies) to be treated as standard".

"Unfortunately, three years later, states have not undertaken many of the actions promised under the FRP, perhaps because the urgency to act was not there so long as banks continued financing losses. Meanwhile, debt has built up further, and the cost of power, including line losses and interest costs, is mounting inordinately," the RBI chief said.

Banks are saddled with trillions of rupees of bad loans at various state distribution companies.

However, he said the government and the RBI are taking the lessons of this experience into account and are discussing remedial action with the states.

In some cases, banks ignore the reality that existing loans will have to be written down significantly because of the changed circumstances since they were sanctioned such as extensive delays, cost overruns and over-optimistic demand projections, Mr Rajan said.

On the 5/25 scheme, which the RBI introduced recently to deal with genuine problems of poor structuring, he said the RBI is undertaking periodic examination of randomly selected 5/25 deals to ensure they are facilitating genuine adjustment rather than becoming a back-door means of postponing principal payments indefinitely.

On the recapitalisation of state-run banks, Mr Rajan said the move is welcome as is the proposal to reward bankers based on progress in cleaning up balance sheets and generating healthy growth.

"The innovative proposal to create a fund with majority private ownership and minority government participation to lubricate the process of resolution could be very helpful," he said.

On the poor pick up in NPA sales to asset reconstruction companies (ARCs) by banks, Mr Rajan said the RBI and the government are discussing ways to revitalize ARCs so that they can play a greater role in resolving distress.