Banks are saddled with trillions of rupees of bad loans

Banks are saddled with trillions of rupees of bad loans at various state distribution companies. However, he said the government and the RBI are taking the lessons of this experience into account and are discussing remedial action with the states. In some cases, banks ignore the reality that existing loans will have to be written down significantly because of the changed circumstances since they were sanctioned such extensive delays, cost overruns, and over optimistic demand projections, Rajan said and partly blames the poor functioning of the Debt Recovery Tribunals, which emboldens uncooperative promoters and keeps them from accepting their share of the losses, for the problem of NPAs.

On the 5/25 scheme, which the RBI introduced recently to deal with genuine problems of poor structuring, under which banks are allowed to stretch repayment profiles for performing loans to infrastructure and the core sector 25 years and recast the loans every fifth year for those projects which are commercially running. He also said the RBI is undertaking periodic examination of randomly selected 5/25 deals to ensure they are facilitating genuine adjustment rather than becoming a back-door means of postponing principal payments indefinitely. On the recapitalisation of state-run banks, Rajan said move is welcome as is the proposal to reward bankers based on progress in cleaning up balance sheets and generating healthy growth.

"The innovative proposal to create a fund with majority private ownership and minority government participation to lubricate the process of resolution could be very helpful," Rajan said. On the poor pick up in NPA sales to asset reconstruction companies (ARCs) by banks, Rajan said the RBI and government are discussing ways to revitalise ARCs so that they can play a greater role in resolving distress.