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    Here's what Raghuram Rajan's wishlist for 2019 looks like

    Here's what Raghuram Rajan's wishlist for 2019 looks like

    Here's what Raghuram Rajan's wishlist for 2019 looks like
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    By CNBC-TV18  IST (Updated)

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    The overburdening of non-performing loans in the banking sector remains a concern in 2019 grappling both the private and public sector banks, former Reserve Bank of India (RBI) governor Raghuram Rajan said in a note. Looking forward, Rajan states many banking reforms as well as revival strategy for projects under the National Company Law Tribunal (NCLT).

    The overburdening of non-performing loans in the banking sector remains a concern in 2019 grappling both the private and public sector banks, former Reserve Bank of India (RBI) governor Raghuram Rajan said in a note.
    Looking forward, Rajan states many banking reforms as well as revival strategy for projects under the National Company Law Tribunal (NCLT).
    Here’s the 2019 wishlist of former RBI governor:
    1. Many of the problems related to bad loans lies in the public sector banks (PSBs). However, private banks such as ICICI Bank and Axis Bank as well as some old private banks may not be immune to the problems.
    2. Public sector bank boards are still not adequately professionalised, and the government rather than a more independent body still decides board appointments, with the inevitable politicisation. Eventually strong boards should be entrusted with all bank-related decisions, including CEO appointment and must be held responsible for performance. Strategic investors also could help improve governance, Rajan said.
    3. Risk management still needs substantial improvement in PSBs, regulatory compliance is inadequate and cyber risk needs greater attention. Interest rate risk management is notable for its absence, which means banks are very dependent on the central bank to smooth the path of long term interest rates. These are all symptoms of managerial weakness.
    4. Project lending has to be improved. Significantly, more in-house expertise can be brought to project evaluation and structuring, including understanding demand projections for the project’s output, likely competition, and the expertise and reliability of the promoter. Bankers will have to develop industry knowledge in key areas or bring on board industry experts, since consultants can be biased.
    5. Real risks have to be mitigated where possible, and shared where not. Real risk mitigation requires ensuring that key permissions for land acquisition and construction are in place up front, while key inputs and customers are tied up through purchase agreements. Government has to deliver what it is responsible for in a timely way. Where these risks cannot be mitigated, they should be shared contractually between the promoter and financiers, or a transparent arbitration system should be agreed to.
    6. An appropriately flexible capital structure should be in place. The capital structure has to be related to residual risks of the project. The more the risks, the more the equity component should be (genuine promoter equity, not borrowed equity, of course), and the greater should be the flexibility in the debt structure.
    7. Where possible, corporate debt markets, either through direct issues or securitised project loan portfolios, should be used to absorb some of the initial project risk. More such arm’s length debt should typically refinance bank debt when construction is over.
    8. Financiers should put in a robust system of project monitoring and appraisal, including where possible, careful real-time monitoring of costs. Promoters should be incentivised to deliver, with significant rewards for on-time execution and debt repayment. Projects that are going off track should be restructured quickly, before they become unviable.
    9. The incentive structure for bankers should be worked out so that they evaluate, design and monitor projects carefully, and get significant rewards if these work out. Equally, bankers who preside over a series of bad projects should be identified and penalised.
    10. Too many risks, which include interest rate volatility, project risks among others devolve onto banks and may return to bank balance sheets. Banks lend money to non-banking financial companies (NBFCs), which in turn lend it out to developers. Rajan, however added that NBFCs must be able to raise money directly from the financial markets.
    11. Financial market development will help banks focus more on risks they can manage better and thus bear more effectively, while sharing or laying off what they cannot. Banks will have to complement financial markets rather than see them as competitor. The use of financial technology will be especially helpful to them in this endeavor, Rajan added.
    12. The government should incentivise all banks to take up activities it thinks desirable, not impose it on a few, especially as the privileges associated with a banking license diminish. Along these lines, requirements that banks mandatorily invest in government bonds (the SLR requirement) should continue to be reduced, substituting instead with the liquidity coverage ratios and net stable funding ratios set by Basel.
    13. Among the more dangerous mandates are lending targets and compulsory loan waivers. Government-imposed credit targets are often achieved by abandoning appropriate due diligence, creating the environment for future NPAs. Loan waivers, as RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government. They are poorly targeted, and eventually reduce the flow of credit. Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest, former RBI governor said.
    14. The government should keep its banks well capitalised, conditional on improvements in governance and management efficiency. This is simply good accounting practice, for it prevents the government from building up contingent liabilities on bank balance sheets that a future government will have to pay for, Rajan said.
    15. The NCLT will help restructure debt for the largest firms and projects under the bankruptcy code. However, the NCLT will be overwhelmed if every stressed firm or project files before it. Instead, a functional out of court restructuring process is needed, so that the vast majority of cases are restructured out of bankruptcy, with the NCLT acting as a court of last resort if no agreement is possible.
    16. Both the out of court restructuring process and the bankruptcy process need to be strengthened and made speedy. The former requires protecting the ability of bankers to make commercial decisions without subjecting them to inquiry. The latter requires steady modifications where necessary to the bankruptcy code so that it is effective, transparent, and not gamed by unscrupulous promoters.
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