Indian industry no longer an infant that needed to be mollycoddled, says Raghuram Rajan

Nov 16 2013, 10:32 IST
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RBI Governor Raghuram Rajan during an address at the Bancon 2013 Conferance in Mumbai. (PTI) RBI Governor Raghuram Rajan during an address at the Bancon 2013 Conferance in Mumbai. (PTI)
SummaryRBI governor Raghuram Rajan worried about country reverting to subsidy regime.

Reserve Bank of India (RBI) governor Raghuram Rajan on Friday asserted that Indian industry did not need to be treated with kid gloves, expressing concern the country seemed “to be reverting to a dialogue of protection and subsidies that we left behind long ago”.

Addressing Bancon 2013, the governor pointed out that industry was no longer an infant that needed to be mollycoddled. “While we should not enter into free-trade agreements that give foreign manufacturers an undue advantage, that is no reason for us to now respond by giving domestic manufacturers protection. We must remember that one domestic producer’s advantage from protectionist profits is paid for by the consumer, or shows up as another domestic producer’s cost disadvantage.” Raghuram Rajan said.

Calling for a a strong bankruptcy law to aid recovery of loans by banks and asserting that a deeper corporate bond market was needed to address long-term financing needs, given how much of the toxic assets were in the infrastructure sector, the governor noted that the short tenures of bank chiefs has been part of the problem. “The natural and the worst way for a bank management, with limited tenure, to deal with distress is to extend and pretend to evergreen the loan, hope it recovers by a miracle, or that one’s successor has to deal with it,” he said.

Raghuram Rajan called for early recognition of financial distress, saying the RBI will incentivise better resolution of distressed loans. “In the next few weeks, we announce measures to incentivise early recognition, better resolution and fair recovery of distressed loans,” Raghuram Rajan said on Friday at the annual banking summit organised by the Indian Banks’ Association.

Cautioning banks from allowing the weakness in assets to fester or from postponing the problem by evergreening, the governor said, “You can put lipstick on a pig but it doesn’t become a princess.”

While restructuring of loans was a legitimate exercise that helped corporates and banks, changing the terms of the loan only to avoid provisioning, the governor said, must be avoided. “I think one has to be very clear that we shouldn’t meddle too much with accounting but focus on bringing the asset back on track, and if there are impediments in doing that, we will look into that as much as we can,” Raghuram Rajan said.

The central bank will implement several recommendations of its internal committee on deepening and broadening the bond

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