With reference to the report, "RBI debt lifeline to promoters & banks" (June 14) by Anup Roy, Abhijit Lele and Nupur Anand, the Reserve Bank of India has been issuing directives to lenders for the one and only objective: reducing bad assets. It is one more case of the RBI's direction.
Banks come across "good promoters, good projects", "good promoters, bad projects", "bad promoters, good projects" and finally, "bad promoters, bad projects". The first and the last groups are not under discussion. In the second group, the issue relates to a bank's business intelligence. The promoters may be good, but how can a lender finance a non-viable project? All promoters present what according to them is a "good project". The onus is on a bank's credit appraisal skill set to distinguish between a "good" project and a "bad" one.
In case of "bad promoters, good projects", banks should not shortlist them for financing. When promoters are bad, lenders do not get back their money even as the former make money. If character is lost, everything is lost.
As for "good" projects, all projects that are presented to lenders look good on paper. After all, the project reports are made up of projections and estimates.
With regard to the steel and power sectors, which have a big share of bad eggs in lenders' books, banks should not have financed them. Instead, companies should have been asked to issue bonds to raise the required funds.
The bond market has its own tools to vet projects that are superior to banks' lending skills. Further infrastructure finance creates a mismatch between assets and liabilities for lenders. They have short-term funds that are used for long-term projects. Here too, promoters should have been asked to issue bonds. No wonder a vibrant bond market is absent in India. But big lenders led by the State Bank of India should set a trend by diverting such borrowers to the bond market.
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The Editor, Business Standard
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Banks come across "good promoters, good projects", "good promoters, bad projects", "bad promoters, good projects" and finally, "bad promoters, bad projects". The first and the last groups are not under discussion. In the second group, the issue relates to a bank's business intelligence. The promoters may be good, but how can a lender finance a non-viable project? All promoters present what according to them is a "good project". The onus is on a bank's credit appraisal skill set to distinguish between a "good" project and a "bad" one.
In case of "bad promoters, good projects", banks should not shortlist them for financing. When promoters are bad, lenders do not get back their money even as the former make money. If character is lost, everything is lost.
As for "good" projects, all projects that are presented to lenders look good on paper. After all, the project reports are made up of projections and estimates.
With regard to the steel and power sectors, which have a big share of bad eggs in lenders' books, banks should not have financed them. Instead, companies should have been asked to issue bonds to raise the required funds.
The bond market has its own tools to vet projects that are superior to banks' lending skills. Further infrastructure finance creates a mismatch between assets and liabilities for lenders. They have short-term funds that are used for long-term projects. Here too, promoters should have been asked to issue bonds. No wonder a vibrant bond market is absent in India. But big lenders led by the State Bank of India should set a trend by diverting such borrowers to the bond market.
K V Rao Bengaluru
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number