 "Rajan hits out at India Inc, says RBI not against growth")
Governor Raghuram Rajan on Tuesday said the Reserve Bank of India (RBI) was not against the country’s economic growth.
“I think there is a misconception in corporate India. RBI is certainly not against growth. We want the strongest growth rate for this country. That means creating a framework to make sustainable growth possible. We have been working on that framework and we are nearly there. I would say, bear with us. Hopefully, if we can reach there and stay there, we will see many years of strong growth,” Rajan told reporters in Mumbai.
The banking regulator on Tuesday kept the policy repo rate unchanged — it was a fifth straight bi-monthly monetary policy review in which the status quo was maintained on the key policy rate. This was in spite of corporate houses often criticising RBI for not reducing the interest rate and blaming it for the economy’s slow growth. In the July-September quarter, India’s gross domestic product (GDP) growth over the same period a year ago moderated to 5.3 per cent, compared with 5.7 per cent in the previous quarter.
“I think it is very short-sighted when people say you are not helping growth this quarter. We are not talking about quarters, we are talking about years of sustainable growth. To get that, you need to fight inflation,” Rajan said.
He also said corporate groups were often asked to pay higher interest rates because of their poor financials and inability to repay existing dues.
“I also see that there is a whole lot of confusion. The immense risk premium that is being demanded of some corporate houses is because of the state of their leverage, because of the risks they have taken, and because of their inability or unwillingness to repay. This should not be attributed to RBI. What we control is risk-free rate, what they can control is the risk premium demanded of them. This is something they should work on, even as we are working on bringing down inflation and a risk-free rate that they have to pay,” Rajan said.
The governor also said RBI was working with the government to improve the functioning of debt-recovery tribunals and deal with corporate groups resorting to malpractices.
“If bankers cannot get their money back, they are not going to give you loans at cheap rates. So... making sure debt-recovery tribunals work better, making sure that you don’t have excess number of stays, excess number of appeals — that is what we need to focus on... There is a certain category of promoters deliberately standing in the way of (loan recovery). There, we have to send a strong message... that kind of action is intolerable in the Indian scenario and you will not get away with it. We are talking with the government, and trying to deal with it,” Rajan said.
He also promised more flexibility to banks while restructuring corporate loans.
RBI has decided to permit the use of 5-25 rule for restructuring of loans to existing projects classified as standard assets. In the 5-25 structure, a bank could fix longer amortisation period (about 25 years) for loans to projects in infrastructure and core industry sectors, with periodic refinancing (of, say, every five years).
Also, banks will be allowed to take more than a 10 per cent equity stake in restructured projects.
These moves are expected to benefit lenders as viability of restructured projects will improve. “Both of these are very positive for banks. It (5-25 rule) will be good for banks, as we would be able to refinance many of the loans where projects are working and cash flows are seen,” said Arundhati Bhattacharya, Chairman of State Bank of India (SBI).
“For conversion of debt into equity, this is required in respect of those projects where we are sure of viability and where banks can actually have a piece of the upside when the projects turn around. Also, this will improve viability,” she added.
“I think there is a misconception in corporate India. RBI is certainly not against growth. We want the strongest growth rate for this country. That means creating a framework to make sustainable growth possible. We have been working on that framework and we are nearly there. I would say, bear with us. Hopefully, if we can reach there and stay there, we will see many years of strong growth,” Rajan told reporters in Mumbai.
The banking regulator on Tuesday kept the policy repo rate unchanged — it was a fifth straight bi-monthly monetary policy review in which the status quo was maintained on the key policy rate. This was in spite of corporate houses often criticising RBI for not reducing the interest rate and blaming it for the economy’s slow growth. In the July-September quarter, India’s gross domestic product (GDP) growth over the same period a year ago moderated to 5.3 per cent, compared with 5.7 per cent in the previous quarter.
“I think it is very short-sighted when people say you are not helping growth this quarter. We are not talking about quarters, we are talking about years of sustainable growth. To get that, you need to fight inflation,” Rajan said.
He also said corporate groups were often asked to pay higher interest rates because of their poor financials and inability to repay existing dues.
“I also see that there is a whole lot of confusion. The immense risk premium that is being demanded of some corporate houses is because of the state of their leverage, because of the risks they have taken, and because of their inability or unwillingness to repay. This should not be attributed to RBI. What we control is risk-free rate, what they can control is the risk premium demanded of them. This is something they should work on, even as we are working on bringing down inflation and a risk-free rate that they have to pay,” Rajan said.
The governor also said RBI was working with the government to improve the functioning of debt-recovery tribunals and deal with corporate groups resorting to malpractices.
“If bankers cannot get their money back, they are not going to give you loans at cheap rates. So... making sure debt-recovery tribunals work better, making sure that you don’t have excess number of stays, excess number of appeals — that is what we need to focus on... There is a certain category of promoters deliberately standing in the way of (loan recovery). There, we have to send a strong message... that kind of action is intolerable in the Indian scenario and you will not get away with it. We are talking with the government, and trying to deal with it,” Rajan said.
He also promised more flexibility to banks while restructuring corporate loans.
RBI has decided to permit the use of 5-25 rule for restructuring of loans to existing projects classified as standard assets. In the 5-25 structure, a bank could fix longer amortisation period (about 25 years) for loans to projects in infrastructure and core industry sectors, with periodic refinancing (of, say, every five years).
Also, banks will be allowed to take more than a 10 per cent equity stake in restructured projects.
These moves are expected to benefit lenders as viability of restructured projects will improve. “Both of these are very positive for banks. It (5-25 rule) will be good for banks, as we would be able to refinance many of the loans where projects are working and cash flows are seen,” said Arundhati Bhattacharya, Chairman of State Bank of India (SBI).
“For conversion of debt into equity, this is required in respect of those projects where we are sure of viability and where banks can actually have a piece of the upside when the projects turn around. Also, this will improve viability,” she added.