Haircut needed to resolve NPAs, says Rangarajan

A haircut is the term for write off a lender accepts on a debt payment when a borrower can't repay

Former Reserve Bank of India governor C Rangarajan says 'some haircut' is inevitable in the process of resolving the big load of bad loans at government-owned banks.

A haircut is the term for the writeoff a lender accepts on a debt payment when a borrower can't repay what is due at a point in time. Needed here, said Rangarjan, since the size of non-perofrming accounts (NPAs) had become so big.

"The clean-up has to be done and perhaps some haircut is inevitable. The question is whether the banks are ready for a haircut and how that is managed. The best result is with the haircut, the loan should once again become good," said Rangarajan, also chairman of the prime minister's economic advisory council in the earlier government.

NPA resolution was important, he said, to stimulate the economy and investments. He felt the process, if decided on, would take at least a year to complete.

NPAs at public sector banks (PSBs) have mounted to a little over Rs 6 lakh crore. The government issued an ordinance in May to empower the central bank to tell individual lending institutions to initiate insolvency resolution proceedings. Last month, RBI identified 12 major accounts in this regard, each having over Rs 5,000 crore of dues, accounting for 25 per cent of the total NPAs of PSBs. These 12 were to be immediately referred under the Insolvency and Bankruptcy Code.

RBI had earlier set up an Internal Advisory Committee, comprising a majority of its independent board members, to advise it on cases that may be considered for such resolution.

On the proposed consolidation of state-owned banks, Rangarajan said mergers should be need-based and the initiative ought to come from the lenders themselves.

Some months earlier, Bhartiya Mahila Bank and five subsidiaries of the State Bank of India were all merged into the latter. The government is looking at consolidating a few more, with the objective of creating three of our large banks.