Raghuram Rajan warns banks against dressing up bad loans

Warning banks against dressing up bad loans and creating greater problems for future, Reserve Bank of India (RBI) governor Raghuram Rajan yesterday said one could put lipstick on a pig, but it did not become a princess.

"Restructuring is a legitimate attempt to deal with changes that have happened, but ever-greening is trying to ignore the problem and taper over for later period and thus create large problems in future. Clearly, an important distinction we need to draw," the RBI chief told bankers in Mumbai last evening at a banking summit.

"You can put lipstick on a pig but it doesn't become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem than recognising it is to be avoided," Rajan said.

He said, ever-greening was when one was trying to hide the problem and restructuring was when one tried to deal with a problem where the original zone did not quite correspond to the altered circumstances.

Stressing that the focus of banks needed to be on getting assets back on track and stop meddling with accounts, he said, "One has to be very clear that we shouldn't meddle too much with accounting but focus on getting the troubled asset back on track."

Promising all the help banks needed, he said, "If there are impediments in doing that (getting back assets), we will look into that as much as we can. We have been talking to a number of stakeholders and we will announce some measures very shortly. We are very focused on measures that will help recognise the problem. On the issue of allowing longer maturity for loans, we are exploring the issue."

Calling for better institutional measures to fight the issue of NPAs, such as good bankruptcy laws where investors in lower grade bonds could feel secure he said, "We have to ensure that the system recognises financial distress early, takes steps to resolve it, and ensures fair recovery for lenders and investors. We could wish for a more effective judicial process or a better bankruptcy system, but while we await that, we have to improve the functioning of what we have."

"In the next few weeks, we will announce measures to incentivise early recognition, better resolution, and fair recovery of distressed loans. We will focus on putting real assets back to work in their best use," he said.