RBI Governor Raghuram Rajan warns banks against unwarranted use of stressed asset schemes

Outgoing RBI Governor Raghuram Rajan has warned banks against “unrealistic application” of stressed asset resolution schemes to postpone recognition of NPAs. Rajan said RBI has a variety of schemes - the 5/25, the SDR and sustainable structuring of assets (S4A) - by which a more sensible capital structure can be crafted for the project which are standard but struggling.

“Some of the current difficulties come from an unrealistic application by banks of a scheme so as to postpone recognition of a loan turning NPA rather than because of a carefully analysed move to effect management or capital structure change,” Rajan said in the foreword to annual report 2015-16 released today.

“RBI will continue its monitoring to ensure that schemes are used as warranted,” he said.

Rajan said that an area of short-term focus with macroeconomic relevance is stressed asset resolution.  The Asset Quality Review initiated in early 2015-16 has improved recognition of NPAs and provisioning in banks enormously. Some banks have taken significant steps in recognising incipient stress early.

The Governor said that focus should now move to improving operational efficiency of stressed assets and creating the right capital structure so that all stakeholders can benefit.

“Where necessary, new management teams have to be brought in, sometimes as owners, and where not possible, as managers.”

Creative search for new management teams, including the possible use of public sector firms or private sector agents, is necessary, as are well-structured performance incentives such as bonuses for meeting cash flow or profit benchmarks and stock options, he said.

If the existing promoters are capable and reliable, they should be retained, he added.