RBI calls for ownership change of companies with sticky loan accounts

Chennai: Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday called for ushering new owners or managers for companies whose loans accounts have gone sticky, to improve their operational efficiency.

In his foreword to RBI`s annual report for 2015-16, released on Monday, he said the asset quality review initiated during the year under review has improved recognition of non-performing assets (NPA) and provisioning in banks enormously.

"Now more focus should move to improving the operational efficiency of stressed assets, and creating the right capital structure so that all stakeholders can benefit. This implies simultaneous action on two fronts," Rajan said.

According to him, where it is necessary, new management teams have to be brought in, sometimes as owners, and where not possible, as managers.

"Creative search for new management teams, including the possible use of public sector firms or private sector agents, is necessary, as are well-structured performance incentives such as bonuses for meeting cash flow/ profit benchmarks and stock options.

"If the loan is already an NPA, there is no limit to the kind of restructuring that is possible. If standard but the project is struggling, we have a variety of schemes by which a more sensible capital structure can be crafted for the project," Rajan said.

Adding a rider Rajan said some of the current difficulties faced by banks are due to an unrealistic application by banks of a scheme so as to postpone recognition of a loan turning NPA rather than because of a carefully-analysed move to effect management or capital structure change.

"RBI will continue monitoring to see that schemes are used as warranted," he said.

Rajan also called for more competition in the financial sector so as to increase efficiency.

"The most appropriate institutions will prevail when the competitive arena is level, so we have to remove regulatory privileges as well as impediments, wherever possible, especially those that are biased towards some form of ownership or some particular institutional form," he added.

According to him, one of the critical components of the medium term strategy in the financial sector will be to strengthen the public sector banks in all aspects, including governance, cost structure, and balance sheets.