Here's what experts say about Raghuram Rajan's views on dealing with bad loans

Khan: As you said, nobody knows what exactly has gone into Supreme Court verdict. This problem is enormous and the matter went to Allahabad High Court and there, RBI and government had taken different points of view. I think this is something very interesting, when both the regulator and the government have different points of view and possibly that could have been in the mind of Supreme Court that there is some reason where there is possibly a scope for going a bit slow and there are some possibilities of resolution so we can get some time. Probably, that could have gone into the minds of Supreme Court while giving this verdict. But as you said, we do not know the rationale, but I agree with Purwar that this is not going to be a showstopper as far as resolution process is concerned. Some time is bought by some banks and borrowers, and this time should be gainfully used to reflect and see what we can do to see that these problems do not return.

Kannan: There are two resolution process, one is the pre Insolvency and Bankruptcy Code (IBC) process and the post IBC process. In the sense that, once the application is made to NCLT, then you have the resolution, where under Section 29A, the new promoters or the existing promoters do not comment. So that is the major deterrent for many promoters who find that they will be thrown out.

For various reasons some of the projects may have been stalled due to no fault of the promoters in a few cases. Like you rightly mentioned a few minutes ago, saying that the discoms, etc. have been asked to make payment and most of them have not paid or they are reneging on the power purchase agreements, etc. So, I have a feeling that this possibly gives some time for them to do a resolution before the IBC process, which is what the Sunil Mehta committee has been thinking upon.

In fact, the RBI, if we see the February 12 circular, it very clearly says that do a resolution before this process. The only thing is they have put a date of 180 days, which could be disputed saying that it's too less or too long. Different people have their own questions and you cannot have an indefinite period for resolution and therefore, the time was given and maybe the Supreme Court will give a particular time.

However, subsequently what is going to happen is, in case a person does regulation now, before the IBC process, and in November, hypothetically speaking the Supreme Court agrees with RBI, then what happens to the prices. In case, he extends it or gives a different version, what will happen? So, this actually creates more confusion, but I think the IBC resolution process is firmly in place and it's a very welcome feature and in the long run, it should be help proper resolution.

Umarji: It's a sort of a temporary stay of the action under the RBI circular. But it's an effort to work out some resolution schemes for the purpose of these projects. I don’t see it as a stay of any law or anything, it's a circular issued by RBI. So, I see that it will ultimately be for the benefit of the industry and the bank.

Khan: I think it’s a very balanced and deep analysis here. Like a good doctor, his (Rajan’s) diagnosis is near perfect. Maybe he have some points here and there. He has not emphasised the way it should have been emphasised maybe lack of pace, but all points he has covered in a balanced manner, both exogenous factors and endogenous factors. Therefore, you cannot just say because of corruption things have gone like that. There are elements of that.

When we studied banking as a student, we used to say that lending should be based on character, cash flow and capital. We realise now that it's based on confidence, crowd behaviour and connection. So you have to balance. You cannot just take a view that it's all, because of corruption it has happened. Certainly, there are cases but he has rightly analysed that there are overenthusiasm, exuberance and unrealistic assumptions about growth. So I think it’s a balanced, but the point which he has not emphasised that much is the role of intermediary and in-house capacity of the bank to evaluate project finance in the absence of long-term institutions.

Q: Would you say that this is an absent faculty due diligence in many banks, because the origin of public sector banks itself was to give working capital, only the development finance institutions (DFI) were expected to give long term capital like in those days, ICICI Bank and IDBI. So, is that a valid point that faculty needs to be developed, due diligence across the banking sector and not only be left to SBI Caps and IDBI.

Kannan: One of the points you made rightly is the absence of DFIs. In IDBI and ICICI merged, did a reverse merger with the banks, one of the reason was their inability to raise funds to lend to large products. So, the only reason the bankers actually have to step in was the absence of DFIs.

Second thing is, in many cases, these banks had taken up project finance because it's one of the easiest way of achieving topline growth. There is also a mention by Raghuram Rajan saying that the overall exuberance in the market because the things are doing very well. Up to 2007-2008, all the purchases were being executed. So, there is no reason to say that went right in the past will go wrong in the future.

There are certain other factors for example, the clearances, which did not come also. So, it's not a question of only relying on the investment bank of promoter. One more thing is the investment banker of the promoter will always project the proposal from the promoter side and make it very rosy, very attractive for the banker to take it up. It's the banker, who has to do the due diligence and then take it up.

There was a mention that people are coming with checkbooks to write, because they all want the topline and there is huge pressure everywhere saying that how much credit growth is good. That is no reason why people would shy away from achieving credit growth.

Purwar: I wouldn't totally agree with that, when we are budgeting within the banking systems. For example, State Bank of India (SBI), we would like to take the total environment of the economy, we would like to have certain budgets.

Purwar: I would agree with what Raghuram Rajan has said, but I would say some kind of budgeting, appropriate budgeting, taking all economic factors into account for credit growth and deposit growth is compulsorily necessary for a bank. Having said that, one thing we must see that in the past also NPAs have been there, NPAs have been the part of the system and NPAs have been tackled. The sudden spurt today, which we are seeing is why? Because if you look at it, you analyse these things, you will find that infrastructure sector, particularly power sector, there are huge amount of NPAs, which have been created. Now, can we not focus on this sector? See to it that this gets resolved.

Umarji: In order to bring back the courage, it's necessary that the mind-set that any default committed is something equivalent to a crime committed has to undergo a change. There has to be a proper investigation, unless there are some specific facts, which indicates corrupt practice on the part of the bankers and the loan has to be treated as a it has gone bad on account of various other factors in the economy. You can’t presume that a default is equivalent to a crime or a corrupt practices.

On the other issue about the out of NCLT resolution plan, you see the issue is that, I am the borrower, I am running the industry, I know when the loan is becoming due, I know that I have committed a default. Once having, I will even know that I am going to committee a default, so you are aware that you are going to be subjected to a scrutiny and a preparation of resolution plan and you are facing a insolvency petition against you, because you have committed a default. It can be filed, if I commit default today, tomorrow insolvency resolution order can be passed against me. So, therefore I can myself prepare a plan, find the cause for my default, study the viability, prepare a plan, place it before the banker, get it approved and then formally get the approval of NCLT.

Umarji: But if you don’t do it, the bankers will do it themselves by filing a resolution application. So, it's something like a system of pre-pack, which is prevalent in UK, where you need to do some work on your own to get the insolvency resolved and that would be outside the NCLT. So the pressure on NCLT will be reduced.