Amidst a massive spike in bad loans in the financial system that will lead to distress sale of NPAs, IMF Executive Director and former Deputy Governor of RBI Subir Gokarn today called for shielding bank officials dealing with dud loan sales.
Calling for a framework for restructuring or sale of bad loans in the light of large-scale defaults, he said "there is a need for a mechanism to provide indemnity to banks for asset restructuring".
"There is a huge deterrent to selling bad assets at a discount as this will come back to haunt banks...So banks are protective about valuation. So we need a mechanism where people making decisions receive some indemnity from accusations that you sold out at a price lower than market price," Gokarn said.
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The noted economist was delivering the Nani Palkhivala Memorial Lecture at IIM-Ahmedabad here.
"I think we could come out with some broad guidelines and formula so that bank officials are protected from a backlash in case they sold out at a discount. After all, these are not bad assets in the business sense," he said.
Gokarn said there were several reasons behind the huge jump in loan defaults reported by banks, which rose to 12 per cent of the system as of the December quarter. Between September and December quarters, banks added more than Rs 1 trillion in fresh net NPAs to over Rs 4.34 trillion.
"Asset liability mismatch was compounded by business cycle problems. There are combination of factors that resulted in much weaker environment in which banks were lending. There are also specific aspects to each case."
On the low credit growth, he said "banks are finding it impossible to take on more risk. There is a kind of a multiple factor explanation of why credit is not growing, and this will affect prospects of recovery".
Suggesting private sector banks to look at the National Investment and Infrastructure Fund, set up to enhance infrastructure funding, he said "almost 50 per cent of bad assets are reported in infrastructure space...So banks will find it hard to take any more risks, in such a scenario NIIF has an important role to play.
