#MUMBAI: Lashing out against promoters of defaulting companies who continue with lavish lifestyles despite owing thousands of crores to banks, Reserve Bank of India governor Raghuram Rajan has said that these businessmen are sending a wrong message and pushing up the cost of borrowing for others.“If you flaunt your birthday bashes even while owing the system a lot of money, it does seem to suggest to the public that you don’t care. I think that is the wrong message to send.
If you are in trouble, you should be cutting down your expenses,” said Rajan in what appeared to be a veiled reference to Vijay Mallya, promoter of Kingfisher Airlines. Mallya had recently celebrated his 60th birthday in style in Goa despite his Kingfisher Airlines owing banks over Rs 7,500 crore.
In an interview to NDTV, the governor said that the clamour for lower interest rates should include efforts to get the banking house in order in respect of default recoveries.
“The system has been geared to favouring those who have the ability to work the courts. The policy that you (large businessmen) follow is that during good times you take the upside but in bad times you go to banks and ask how much of a haircut are you going to take?” He said that while the bankruptcy law would be a powerful tool, it had some way to go. In his interview, Rajan said that this was not about being against big businesses or successful businessmen and neither was it a Robin Hood issue. “This is an issue about the wrongdoers among the community who raised the cost of borrowing for everybody.”
Rajan’s statement from Davos is his latest in his campaign for promoters having more ‘skin in the game’ and bearing a bigger portion of the sacrifice on bad debts. A fortnight back, he had asked central bank staff not to hesitate in going after the rich and powerful.
Earlier, Rajan identified corporates who were showing signs of financial weakness but were not yet classified as defaulters.
Banks were asked to classify them as defaulters and make provisions toward the same. Classifying the loans as bad debts prevents lenders from throwing good money after bad and compels them to initiate recovery proceedings by recalling the loan amount and selling assets.
Analysts expect that banks would need to set aside Rs 70,000 crore in the third and fourth quarter of the current fiscal year to write off the loans highlighted by the RBI.
In the first half of FY16, banks have set aside Rs 50,000 crore towards loans that were unlikely to recover. Gross non-performing loans of listed banks had touched Rs 3.5 lakh crore as of September 2015.
Last year, Rajan convinced fellow regulator Sebi to amend rules to enable banks to convert their debt into equity at market rates. This special dispensation enables banks to engage in a process which the RBI describes as strategic debt restructuring ( SDR) through which they take control of businesses and sell them to new owners.
In a 2,500-word letter to staff earlier this year, the governor had urged employees to go after the rich and powerful.
“No one wants to go after the rich and well-connected wrongdoer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop. Importantly, this does not mean being against riches or business, as some would like to portray, but being against wrongdoing,” Reserve Bank of India governor Raghuram Rajan has said
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