Separate morality from NPA clean-up, says Rajan

The RBI governor Raghuram Rajan said that the NPA clean-up is simply about whether the loan is 'performing or not performing'

Amid raging controversy over loan defaults by corporates, Reserve Bank of India (RBI) Governor Raghuram Rajan has said the issue of bad loans gets "loaded with a lot of morality" and it is necessary to keep criminal liability separate for putting the stressed assets back on track.

"What's happening on the NPA (non-performing assets) front...This becomes loaded with a lot of morality, are these good people, bad people. I think one should take out the morality from the NPA clean-up," he said delivering the Inaugural Kotak Family Distinguished Lecture at Columbia Law School here on Monday.

He was asked whether the non-performing assets (NPAs or bad loans) were a concern for him given that some "big names and big companies" in India are linked to the problem.

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The RBI governor said that the NPA clean-up is simply about whether the loan is "performing or not performing. It may have become non-performing simply because you had terrible luck or somebody else's fault. Somebody cancelled your licences, didn't give you approvals on time, your partner didn't perform. There could be all sorts of reasons why companies get into trouble".

If companies get into trouble, the loan becomes a non-performing asset and "we very much want these assets to be back on track", he said.

"It is a completely separate issue of who to blame and whether there is criminal liability involved. In some fraction of the cases there may be criminal liability involved. That should be separated from the whole issue of putting the assets back on track," he said.

Asserting that the "asset is not a criminal", he said the asset can produce value and can function. "It should be allowed to produce value even while there is a separate case going on if there was criminal activity involved," he said.

Rajan emphasised that the government has said very clearly it will not interfere in the process of granting loans. "I think that is a very important development. The next stage has been on trying to improve the administrative structure in the banks," he added.

Rajan said that last part of the post-tantrum stabilisation agenda has been to clean up the stressed assets in the banking sector in order to ensure banks have the room to lend again.

"We do want to have our banks get their money back. For that we need a proper bankruptcy system, a court system that functions in finite time and we didn't have that in the past," he said.

He expressed hope that "there is reasonable chance" that the bankruptcy code bill will be passed soon and that will ensure a fully functioning system "where you can renegotiate outside of bankruptcy but the shadow of bankruptcy keeps you from getting away with too much either on the banking side or the promoter side".