Reviving investment is key to boost growth: Bimal Jalan

In an interview to CNBC-TV18, Bimal Jalan, former RBI Governor, speaks on RBIs restructured assets report, where RBI wants to stop the practice of restructuring a loan just to keep it from being classified as a non-performing loan (NPL).

Adding that the economic situation is undoubtedly worrisome, Jalan feels that reviving investment is the key. 
"I think that there is no doubt in my mind that you need more investments. Government also wants more infrastructure investments. The second issue is what it needs to do about financing such investments because our fiscal deficits are also high. So, on that front also we have to take action," he says in an interview to CNBC-TV18's Latha Venkatesh. Here is an edited transcript of his comments. Q: A RBI group has recently recommended that in two years time the entire notion of restructured assets without calling them NPLs should be done away with. Do you think the time has come for such a seminal move?
A: No, no it is not a seminal change. With the evolution of financial markets you have to keep adjusting your rules to make the most or make the best of whatever is going on. If there are bad assets which are being restructured it is much better to get them accounted as NPLs rather than provide an opportunity to give loans without credit worthiness and so on. So, it is something which has to be carefully thought out and whether its 90 days or then you can spare for some more time – 180 days or something is a very temporary problem.
But if the experience is that restructured loans become NPLs over say 5 or 6 years then it’s a good rule to change it. Q: Bankers tell us that less than 20% of restructured assets actually slip into NPLs and they argue a handholding is called for. Branding all assets as NPLs will only kill the good cases? So do you think that there is a case of regulatory forbearance?
A: That’s a good point. I do hope that before the final decision is taken RBI would give attention to some of these issues also in terms of statistical data which are available. Supposing 20% of the restructured assets become bad loans then they would have to also see over what period of time? 80% become alright then over what period of time? What sort of restructuring helps? These are all working group reports and they would look into it. But that’s an interesting point you are making. I was not aware that the percentage was that low. Q: Then isn’t there a dilemma here? Having a restructuring window attracts several shady companies; and yet not having it can kill some good companies. Which way should the regulators tilt?
A: No this is true of many policy decisions. There is no clear cut answer, if there is a clear cut answer you wouldn’t have to have a working committee or working group and so on. Therefore what they would have to decide.
First study the whole matter a little more in terms of both the time period over which structured assets become good or bad, what is the percentage of these loans and what would be a good way of repackaging these measures either in terms of time period. For example you could say that, you can restructure for two years or three years but not more or you can say that you can restructure 10% of your assets but no more. So, these ideas would have to be explored further. Q: The RBI has ruled that foreign banks with more than 20 branches should be at par with Indian banks as to their priority sector obligations. Do you agree with this position? Is it a tad unfair considering that foreign banks are not given branches very easily?
A: The point you have raised is a valid one. But I feel in the new financial system or emerging financial system which is highly globalized that we should have uniform rules and we should have a competitive financial sector where there are no preferential rules for one set of banks vis-à-vis another. So, in principle the same rules, same banking norms must apply to all who are operating in our country. That I endorse.
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The second issue which is equally important is that then what would you do about making sure that the branches, branch network of foreign banks which are also subject to clearances. In the new financial markets and financial system, globalisation has become important. So, we would have to take a more liberal view there also.
But the fact that banking norms are the same for domestic banks as well as for all other banks operating in our country is a good one. Q: More generally, is the asset quality of Indian banks worrisome according to you?
A: You see the fact that NPA's are rising means that the economic slowdown is affecting the banking sector, in terms of repayments, bad loans etc. This is a part of the economic slowdown. The central issue is whether it is cyclical or whether is a structural over a long period of time. If it is over a long period of time then obviously you have to recapitalise banks more strongly than we are doing now.
If it is cyclical and say that it would remedy itself. The markets would become much better in terms of our default ratios or NPA ratios to reduce themselves over a period of time then we don’t have to worry too much. Q: Do you think we are in a protracted slowdown? During your tenure at RBI you saw a near 6-year downturn – 1997 to 2002-2003. Is it looking something like the late 90s, could it get as protracted as that?
A: I don’t want to compare this situation with any other situation. All situations are different. It is absolutely clear that the economy is in a slowdown mood. Confidence of investors is very weak and as you can see people are waiting and watching, the expectations are not so good, except consumer goods etc are doing alright, but demand has fallen and something has got to be done.
What needs to be done in the present situation is a larger issue which I don't want to go into right now. But it’s a matter of concern and we have to handle it before it gets out of control. This is the most central point I want to make, that we can’t just slug along as it were. Q: But does it look like it’s going to be several years affair rather than just a several quarters affair - the slowdown?
A: I would not like to put a time period on it but the fact is that the slide has occurred and has persisted over at least four quarters. The sharp slides may have occured in the last two quarters. But if we go back - everybody was saying, all the policy makers, etc. - that growth will be XYZ which is 1-2 percentage points higher than what it is now, that industry will recover on its own, that we announce policies which we reverse, then we announce policies which we don’t implement.
So, lot of these kind of issues have to be sorted out and I hope they will be sorted out irrespective of whether the economy or view on the outlook is. The current situation needs to be handled and managed in a way so that we can reach, it’s not a cyclical slowdown. I think it’s a question of confidence, expectations and investment which is suffered. We must take care of all these.
_PAGEBREAK_ Q: Actually all the macros are worsening. Consumer inflation is above 10%. Growth is down to 5%. Investment is contracting, it’s not slowing; it’s actually in aggregate terms contracting. What according to you is the key policy action that the government needs to take? Would it be attending to the fiscal first?
A: I think that there is no doubt in my mind that you need more investments. Government also wants more infrastructure investments. It has set up committees and so on. I think we just have to move very fast in increasing investments. The second issue is what it needs to do about financing such investments because our fiscal deficits are also high. So, on that front also we have to take action.
I don't see there is very much more, much greater option than having to take some tough measures or some difficult measures or politically sensitive measures - like adjustment of prices of oil products, prices in other sectors which can give us the elbow room to increase investment and financing without leading to higher inflation. Q: You said reviving investment is the key. What role do interest rates play in this? Is it time to give an interest rate feel good so that investment gets a fillip?
A: It’s too close to the next policy announcement because I don’t generally make an observation of what Reserve Bank should do or should not do. But there is not much doubt in my mind that at the moment we have to introduce measures so take measures; whether there are monetary fiscal investments, policy - wherever, whatever we can do to encourage the prospects of higher growth in the economy. This is the most important priority that we should give ourselves.
All the agencies should try and give signals that yes, this is something that deserves to be supported. But I am not commenting at all on what the policy would actually do. It depends on what the trade offs are, what the issues are. I am sure that we will know in a couple of days or three-four days. Q: But the Reserve Bank is also battling inflation at 10%. Even the wholesale price headline is nearly a 7.5%. Can it still afford to go for growth?
A: There is always a trade off. You have to choose your priority. If inflation can be controlled, if you can say that in three months or six months I will control inflation by doing something. If the inflation is food related, if inflation is related to drought then what is that you can do. You can’t do very much on that score.
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So, the question is that how can we boost and give growth in terms of investment, in terms of growth prospects, in terms of policies and that we do much more than we talk. Q: The choices are starker today. Inflation is in double digits, growth is down to 5%. Which way should policy makers lean?
A: But I think the point you are making is probably correct. But that makes it even more interesting to take policy measures which can to certain extent stabilise the economy while giving boost to investment. We have done it in the past. It’s not as if we can’t.
Today the opportunities are much greater. When did you have savings rate of the order that we have now? When did you have entrepreneurial energy of the type that we have now? When did you have India’s reputation to be able to do what it wants to do that we have now? When did you have the technological access that we have now. So, I think that these problems can be handled.
Yes, there would be a trade off, there would be a strong action to be taken and in some respect it may also be unpalatable to us who may have to pay more for certain resources that we are now getting subsidised. But we have to take these measures. My point is essentially that yes, this is a difficult time. The trade offs are strong but I believe that we can take the measures which need to be taken to give a signal to investors to give a signal to consumers and give a signal to the country that yes, we are on a higher growth path.