Accusing some large borrowers of enjoying "riskless capitalism", RBI Governor Raghuram Rajan today said such entities were responsible for making banks' credit profile unhealthy and these big clients were in effect becoming 'freeloaders' in the banking system.
Rajan also said it is the taxpayers and honest borrowers who end up paying the price for losses suffered by state-run banks due to bad loans given to a few big borrowers.
A large borrower, whose loan has turned bad, should not be "lionised as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country," the RBI Governor said.
The comments come in the backdrop of many public sector banks facing huge amounts of bad loans, mostly given to some big corporates while recovery process has been hanging fire in many such cases for months together.
Asserting that he is not against risk-taking, Rajan said in cases of any stress, the promoter threatens to run an enterprise to the ground, asking the government, banks and regulators to make necessary concessions to keep it afloat.
"We have to ask if our system of credit is healthy. Unfortunately, the answer is that it is not. The sanctity of the debt contract has been continuously eroded in recent years, not by the small borrower, but by the large borrower," Rajan said while delivering the third Verghese Kurien lecture at Institute of Rural Management here.
In scathing remarks on the misuse of the system by the large borrowers, Rajan, who has earlier written a book titled 'Saving Capitalism from the Capitalists', said taxpayers and honest borrowers end up paying the price due to the excesses committed by large borrowers by way of losses to state-run banks and high pricing of loans.
"If the enterprise regains health, the promoter retains all the upside, forgetting the help he got from the government or the banks--after all, banks should be happy they got some of their money back!
"What I am warning against is the uneven sharing of risks and returns in enterprise, against all contractual norms established the world over-where promoters have a class of 'super' equity which retains all the upside in good times and very little of the downside in bad times," the academic-turned-central banker said.
Among various cases, the Rs 7,000-crore debt of Kingfisher Airlines has gone bad and total NPAs in the banking system coupled with restructured loans have crossed 10.4 per cent mark in the first half of this fiscal.
Rajan acknowledged that there is a growing restlessness in the society about such reckless behaviour of corporates.
On public perception that big borrowers are getting away due to "sweet deals" between the promoters and the bankers, Rajan sought to defend the lenders, saying they are rendered "helpless" while dealing with a large and influential promoter having many resources at command.
"The promoter enjoys riskless capitalism...When some businessmen enjoy a privileged existence, risking other people's money but never their own, the public and their representatives get angry," Rajan said.
