Bad Loan and RBI Governor Raghuram Rajan

In India there are so many Banks NBFC and other financial companies are involve in the financing activities but it also increase a risk of fraud in the economy. This page uses a single-country setting, India, to examine the complex linkages between legal and business environments, financing channels, and growth patterns of different types of firms. Despite the English common-law origin, a British-style judicial system and a democratic government, Indian firms appear to be beset by weak investor protection in practice and poor legal and government institutions characterized by corruption and inefficiency. With extensive country- and firm-level data sets, including both cross-country and within-India firm samples and our own surveys of small and medium firms, we find that to a large extent Indian firms conduct business outside the formal legal system and do not rely on formal financing channels from markets and banks for most of their financing needs. Instead, firms across the board, and in particular, small and medium firms, use non-legal methods based on reputation, trust and relationships to settle disputes and enforce contracts, and rely on alternative financing channels such as trade credits to finance their growth. The scope, methodologies, and results of our paper paint a more complete picture of the law-finance-growth nexus and how businesses and investors respond to the limitations of legal system and formal financial system than existing studies.

 

Bad Loan and RBI Governor on it.

“Asked to explain the “real causes” of ballooning bad loans at public sector banks, RBI Governor Raghuram Rajan has put the blame on “overall economic downturn”, among other reasons, in his submission to the key Parliamentary Panel.

Congress leader K V Thomas-led Public Accounts Committee (PAC), whose term ended on Saturday, has examined Rajan’s response but can ask the RBI Governor to appear before it in future once it is reconstituted, sources said.
Various public sector banks may also be asked to appear before the panel again to explain their position.

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The Parliamentary Panel had suo motu decided to examine the non-performing assets of the public sector banks, which touched Rs 3.61 lakh crore at the end of December 2015.

At the end of December, as many as 701 accounts with bad loans exceeding Rs 100 crore owed public sector banks (PSBs) Rs 1.63 lakh crore, while SBI accounted for the biggest chunk.

PSBs had first refused to appear before PAC, but agreed later and made their submission.

During the examination of bad loan recovery process of the banks, the PAC found that in a number of cases the same bankers were trying to retrieve the bad loans who had earlier sanctioned the loans.

“Since the same officers, who sanctioned the loans are trying to retrieve it, it remains to be seen how successful they will be.. It seems they did not have a mechanism,” a PAC member said on the condition of anonymity.

In its questionnaire for the RBI Governor, the panel observed that Private Sector Banks and Foreign Banks do not have as much NPAs as the Public Sector Banks. This was despite the constraints under which the entire banking sector operates being the same, except for the Priority Sector Lending (PSL) requirements.

Noting that Private Sector Banks and Foreign Banks have 2.2 per cent NPAs whereas the Public Sector Banks have 5.98 per cent NPAs, the PAC felt “it is hard to believe that the difference is only due to the PSL”.

The PAC Chairman also sought to know the “real causes for the present spurt in NPAs and stressed assets” and whether these are really different from those listed by the Narsimham Committee that went into the NPA issue in 1998.

In his reply, Rajan said, “While some of the reasons for recent spurt in NPAs could be subset of those indicated by Narasimham Committee, the level of stressed assets are seen in the context of overall economic downturn”.

Rajan listed six primary reasons for spurt in stressed assets that have been observed in recent times.

These included domestic and global economic slowdown, delays in statutory and other approvals especially for projects under implementation and aggressive lending practices during upturn as evidenced from high corporate leverage.

Other reasons cited by Rajan were laxity in credit risk appraisal and loan monitoring in banks and lack of appraising skills for projects that need specialised skills resulting in acceptance of inflated cost and aggressive projections.

Besides, he also listed wilful default, loan frauds and corruption in some cases among the key reasons.

Recalling that the gross non-performing assets (NPAs) ratio had steadily declined from 15.7 per cent in 1996-97 to 2.36 per cent in 2010-11, Rajan said that the asset quality of the Indian banking system has again come under stress in the last couple of years, as a consequence of global as well as domestic economic slowdown.

“As on March 25, the gross NPA ratio was 4.62 per cent. As on June 2015, the gross NPA ratio was 4.97 per cent and the ratio of restructured standard assets to gross advance was 6.50 per cent,” he said in the reply.

Rajan also informed the panel about seven key methods evolved by way of recent regulatory measures by RBI to tackle the problem of NPA.

The Committee, however, felt that the six reasons cited by Rajan were not “mutually exclusive” and wanted to know how much of NPAs and stressed assets are attributable to genuine business/commercial risk and those which are not.

Rajan said that during the course of an internal study conducted to assess the causative factors of NPAs in April
last year, primarily qualitative information on causes of NPA in banks were sought from the responses received from banks, the main reasons with broad categorization of ‘economy-wide factors, borrower-level reasons and bank level inadequacies’ came to the fore.

“However, based on responses, it was not possible to specifically derive how much of the NPA (quantum) were attributable to which specific reason as often several reasons, sometimes mutually reinforcing, played out at the same time to turn a loan into NPA,” the RBI Governor said.

Rajan also noted that banks tend to attribute most of the non-performance issues to business/commercial risks of the borrowers, whereas the borrowers attribute such situations to macro-economic factors for banks for not providing timely finance/enhancements etc.""Source - http://indianexpress.com