Ex-FM Sinha warns against evergreening bad loans

Former finance minister Yashwant Sinha on Friday cautioned banks to desist from evergreening of loans or restructuring of debts as it was not good for the health of financial sector. Evergreening refers to the practice of giving a fresh loan to repay an old one.

"If you (banks) think that there could be improvement in the economy, then by all means go ahead and restructure (certain loan portfolios) the debt but for God's sake, don't do evergreening," he said at a function organised by Assocham.

Non-performing assets (NPAs) are rising as the economy is not doing well, he said, adding it would automatically decline with more economic growth. Reserve Bank of India (RBI) Governor Raghuram Rajan had said dressing up of bad loans created bigger problems for the future. Sinha warned that lakhs of crores worth of stalled projects are bound to turn into NPAs, with banks having advanced money against these.

He asked banks to seek help from asset reconstruction companies to relieve their burden. He also expressed concern that interest rates haven't been reduced commensurate with RBI's reduction of 0.75 per cent since this January.

On RBI policy action, Sinha said the central bank could have been less hawkish in its stance but warded off fears that coupled with monsoon worries, it might affect foreign investor sentiments. He further said there is a case for corporate debt restructuring (CDR) in case of a cash crunch due to poor economic conditions. Remembering his days in the finance ministry, Sinha said he had started CDR and the underlying formula was to reduce interest rates, which is not the situation today.

Talking about concerns over the weak monsoon, Sinha said, "Anyone who is familiar with crop season and behaviour of monsoon would agree with the finance minister that it does not depend upon all-India percentages but on spacing and timing of the rains."