Will make wilful defaulters public: Rajan

The RBI is working on a new system for making public the list of wilful defaulters, RBI Governor Raghuram Rajan said on Saturday. Further, a new mechanism is being evaluated for out-of-court settlement of bad loan-related disputes, he added. However, "we need to be weary of killing entrepreneurship... by putting all unsuccessful risk taking in the same basket", he mentioned.

Reserve Bank is working on a new system for making public the list of wilful defaulters, while a new mechanism is being put in place for out-of-court settlement of bad loan-related disputes...

Reserve Bank is working on a new system for making public the list of wilful defaulters, while a new mechanism is being put in place for out-of-court settlement of bad loan-related disputes, Governor Raghuram Rajan said today.

“As a regulator we have no intent or desire to protect malfeasance… We are very happy to make that list public. In fact my people are working on making sure that we can put that list up in an accessible way and also (of) defaulters against whom suit has been filed because that is already public information,” he said while delivering a lecture here.

However, the central bank was in favour of protecting privacy in cases where there is no wrongdoing, he said, adding a blanket edict that everybody’s name should be made public on the website might not be desirable.

He further said it might not be correct to flash the name of all and sundry, including those who forgot to pay their credit bills.

Such persons, Rajan said, could not be clubbed with serious bank loan defaulters otherwise people might start trowing away their credit cards.

“We have to be weary of killing entrepreneurship in this county by putting all unsuccessful risk taking in the same basket. We need risk taking, we need people to take risk,” he added.

Rajan added the RBI is creating a structure for an out of court settlement of the disputes relating to bad debts.

“At RBI, we are creating a structure to help out-of-court resolution and we are still at work, it’s work in progress. We are fine-tuning it, making sure it works,” he said.

Complimenting the government for passing Insolvency and Bankruptcy Code Bill, the RBI Governor said, “So given that fact that we have moved forward at all (On Bankruptcy Bill)… is a credit to the system. Will the Bankruptcy code take time to put in place, I think we can move faster on it.”

Rajan said till recently Indian banks did not had enough power to persuade promoters of companies to pay loans.

“Till recently the threat that banks could make to promoters was meaningless, which is why promoters could go to bankers and say take 25 paise on the rupee, otherwise I will see you in a court for the next 15 years,” he said.

Rajan said if the banking system fails to deal with the problem of bad debt now, it would explode.

“At some point you will have to bite the bullet and say the world is not getting better, the economy is taking time to recover, this problem will explode, if we don’t deal with it now.

“And that’s why the RBI has been very focused in dealing with the problem. And I think we have it contained,” the RBI Governor said, adding India is proceeding with the financial reforms in a steady manner.

Replying to a query, Rajan said tariff that helps a particular producer is a cost to another producer who buys the output.

“So in rendering one segment competitive, we may render other segment uncompetitive. If this happens based on lobbying then we run the risk of introducing practices that we did away in past. So we have to be very careful,” the RBI Governor said.

He expressed hope that US Fed will tread cautiously on its rate decisions.

Observing that several countries across the world are deleveraging their economies, Rajan said conventional monetary policy may have run out of steam and additional stimulus is not triggering growth in the world economy.

‘Too much regulation may lead to danger of shadow banking’

Warning against excessive banking regulation, RBI Governor Raghuram Rajan today said this may lead to activities shifting to shadow financial system and admitted to the lack of “know-how” for such businesses.

The outspoken Governor also appeared to disapprove of the lower interest rates to boost growth, saying low rates actually lead to people saving more rather than spending.

Delivering a lecture here tonight, Rajan also suggested that the “definite slowdown” in branch expansion by foreign banks in India could be due to regulation among other reasons.

“What happens when you put pressure on one side of balloon? It balloons out on the other side. So is there a danger that by regulating the banks so strongly, we have shifted activity — not just risky activity but human capital — to shadow banking system,” he said at a lecture here.

While shifting risky activity may be good thing, but if smart people are also shifted out into the shadow financial system then “I don’t know if a less smart bank is less risky,” he said.

Rajan said the central bank knows how to regulate banks and has regulated them.

“But we don’t know how to regulate the shadow financial system and we haven’t regulated that as much,” he said.

It may be argued that it was the smart guys who took the bank down but smart guys also do the risk management as also correct valuations, Rajan said, while asking, “Is a less smart banking system more of a risk or less of a risk that is the question we should ask ourselves?”

Shadow banking system typically refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight.

This may include unregulated activities by regulated institutions and has mostly escaped regulation primarily because it did not accept traditional bank deposits.

The Reserve Bank Governor said the idea or intent behind regulation was to reduce complexity and financial engineering while creating risks for the banking system.

“But in that process have you also reduced the ability of the banks to take needed real sector risks anymore. And that is the question we have to ask,” he said.

While it is being asked where the real investment was taking place or where the economic growth was, “we have regulations which could again have the potential to pull (away) banks from taking on real risks,” he said as he put lending to small and micro enterprise in that category.

Also, there was a definite slowdown in the expansion of branches of foreign banks in India.

“That has slowed down tremendously since the (2008 financial) crisis. And one could argue that it is a fall out of the global financial crisis and the regulation,” he said.

Rajan said, in a global financial crisis, banks have access to central bank window in case of liquidity shortage, but non-banks won’t have access to the window to be able to cope.

Stating that if the global economy hasn’t got strong growth even after 7 to 8 years after 2008 meltdown, Rajan said the problem may be that not enough of conventional policy was resorted to.

“Could easy and unconventional monetary policy be increasing be part of the problem? It was part of the solution post financial crisis. Liquidity provision was extremely important. However what was done then has continued… for long,” he said.

Asking if an aggressive monetary policy could have run out of steam, he said very low cost and easy capital does not “turf out” inefficient firms.

“Lower the interest rate, the more is the saving… People aren’t going out celebrating when interest rates get cut.

Rather people are actually saving more because they need pension, they worry about viability of government fund pensions,” he said.

If debt levels increase in a country, instead of encouraging more spending, it would start saving knowing the tax burden to pay down the debt.

“You could have perverse effects of very low interest rates, perverse effects of substantial fiscal stimulus, these things eventually run out of steam,” he said.

Rajan said it is hard to think in the international economic setting of which assets are free of mis-pricing. “I am not saying they are mispriced, I am saying there is a lot of uncertainty of mispricing given the extremely aggressive monetary policy.”

Rajan said one of the concerns of aggressive monetary policy is that it might encourage depreciation of the exchange rate.

“In an environment of weak global demand, when I depreciate my exchange rate making my goods more attractive to the other countries’ citizens, but those citizens in that country, they already have weak demand. So what we are doing is essentially taking their demand from them by depreciating our exchange rate,” he said.

He said competitive depreciation is a big concern during the Great Depreciation. “These are called ‘beggar thy neighbour’ policy, you depreciate in order to take demand from others. No industrial country today, except Switzerland, has directly targeted exchange rate. Sweden is talking of doing it, but no country has done it”.

The primary effect of cutting interest rate may be to depreciate currency, rather than to generate domestic demand.

On inflation targeting, Rajan said when the rate of price rise threatens to fall below the lower band or zero, one of the options before the governments and central banks is ‘helicopter drop’ of money — a term used for central banks printing large amount of currencies and giving it directly to the public or through investment in public projects to spur spending and eventually economic growth.

He, however, said there is a probability that people may not spend the money and save it thereby not contributing to growth.