NPA probes to identify criminality, not chill lending: Rajan

Investigations into loan defaults should look at establishing criminality while guarding against indiscriminate targetting that can "chill" bank lending as well as the economy, RBI Governor Raghuram Rajan said today.
In all such cases, they should try to look at the circumstances in which bank loans were given to these companies -- whether they were in the right spirit, given the information that was known then -- and "be careful about hindsight being 2020", he said.
"Both the Finance Minister and I have said it is important that we investigate to see the mistakes as well as criminal activity that may have taken place, but do it based on judgements that would have had to be made at that time and don't use today's thinking and information to guess at that," he said.

"Otherwise, you will chill bank lending and you will make sure that we really don't get any risk-taking in this economy by entrepreneurs or bankers... We need both to get the economy to grow, that care has to be taken," Rajan told reporters after the first bi-monthly review of monetary policy in the current fiscal.
He said that if banks give loans to some sectors which are currently weak but the weakness is considered to be temporary, and if some forbearance is being given, it does not immediately imply that there was banality, there was corruption and it was a bad action.

"So, one has to be very careful if three years from now these sectors turn out to be even worse or tend to have collapsed. But the action taken to support the sector at that time should not be seen with the 2020 hindsight," said the Governor.

On the Kingfisher Airlines default case, Rajan said he does not want to take specific names, but added that the RBI is cooperating with other investigative agencies.
Rajan said the regulator's role is not to offer loans, but
to set the principles for lending.
"First important thing to remember is that the regulator doesn't make a loan. The regulator offers the principles on when a loan will be termed a bad loan, an NPA or when forbearance could be exercised, it could be considered a performing loan," he said.

When the regulator decides whether a loan deserves a forbearance or not, it is based on whether he thinks the industry or a sector will broadly recover, and therefore, forbearance can be exercised, Rajan said.
Explaining the rationale behind forbearance in the past, he said most of those instances happened when the economy was slipping into trouble and plenty of requests from across the sector for forbearance came to RBI.
Based on such request from variety of parties, including the banks and the government, forbearance was allowed on principles that the RBI had agreed to, he said, adding that the forbearance regime came to an end in April 2015.

"So, in the Kingfisher case as well as elsewhere, forbearance was based on estimates of whether the industry would recover or not," he said.
He said today the government is helping the steel industry and is working to ensure that it gets back on track.
"Similarly, the regulator, under certain circumstances sees an industry is in distress, may believe certain amount of respite may get the industry back on track because converting loan into NPAs may in fact chill lending. That sort of the judgement call has to be taken at that time," he said.