Raghuram Rajan, former governor of the Reserve of India (Photographer: Dhiraj Singh/Bloomberg)

India Needs Out-Of-Court Restructuring Process For Stressed Assets, Says Raghuram Rajan

Former Reserve Bank of India Governor Raghuram Rajan said India needs a functional out-of-court restructuring process for stressed assets so that most of the cases are resolved out of bankruptcy code.

The National Company Law Tribunal can act as a court of last resort if no agreement is possible, he said. “The NCLT will help restructure debt for the largest firms and projects under the bankruptcy code,” Rajan said while releasing the report, 'An Economic Strategy for India'. “The tribunal will be overwhelmed if every stressed firm or project is filed before it.”

The report -- authored by 13 senior economists -- outlined a host of economic priorities for India over the next five years and comes ahead of the general election next year. Among the priorities highlighted by the economists is the continuing need to clean up banks’ balance sheets.

India Needs Out-Of-Court Restructuring Process For Stressed Assets, Says Raghuram Rajan

As a part of this, Rajan said both the out-of-court restructuring and bankruptcy processes, according to him, need to be strengthened and made speedy. “The out-of-court restructuring process requires protecting the ability of bankers to make commercial decisions without subjecting them to inquiry,” Rajan said. “The Insolvency and Bankruptcy Code requires steady modifications to make it effective, transparent, and not gamed by unscrupulous promoters.”

But for many projects, he said, financial restructuring is of little use if the project cannot proceed for other reasons such as lack of land or permissions or input supply. “Any new government will have to give priority to rectify these issues.”

Improving Governance At State-Owned Banks

Public sector bank boards are not adequately professionalised, and the government still decides board appointments, with the “inevitable politicisation”, Rajan said.

Eventually, strong boards should be entrusted with all bank-related decisions, including appointment of chief executive officers, but held responsible for performance, he said. “Strategic investors could help improve governance.” State owned banks also need to strengthen their risk-management and regulatory compliance functions, said Rajan.

Commenting on the need to recapitalise public sector banks, Rajan said that capitalising banks through budgetary resources is against the interest of minority shareholders.

Need To Shun Farm Loan Waivers

Rajan also stressed on the need to shun farm loan waivers as they create “enormous” problems for state finances.

A number of states have announced farm loan waivers over the last two years. The quantum of such waivers is already in excess of Rs 1.2 lakh crore. Following the recent state elections, economists fear that more such waivers at the state and central level may be considered. In the report released today, the group of economists said that loan waivers divert spending away from other priorities such as building out infrastructure in the agriculture sector.

The question is whether the flows to farmers are best affected by waiving loans. After all, there is only a subset of farmers who get those loans. And so it often goes to the best connected rather than those who are most poorly off. Second, it obviously creates enormous problems for the fiscal of the state. And I think, unfortunately, it inhibits investment down the line.
Raghuram Rajan, Former RBI Governor

Key Highlights From The Report

Macroeconomic Stability

The economists highlighted that India’s economic history is replete with the lesson that protecting macroeconomic stability is essential for strong and sustainable growth.

Every time macro stability has been traded off to boost growth, the economy has been pushed towards a crisis, the consequences of which have undermined the very growth that was the initial policy focus.
Report On India’s Economic Priorities

Some of suggestions of maintain stability include:

  • Sticking to the path laid out by the Fiscal Responsibility and Budget Management Review Committee such that the consolidated fiscal deficit is brought down to 5 percent and general government debt to 60 percent of gross domestic product.
  • Formulating a “grand bargain” between the centre and states, giving states incentives to be aligned with the centre’s fiscal goals—something that is almost entirely missing.
  • Better accounting for contingent and off-balance sheet liabilities of the states and the centre, so as to estimate overall government financing needs, and therefore its claim on savings. This is especially important when we add necessary healthcare and pension schemes that will last well into the future. Such entitlements have to be costed based on long-term use and growth, not on current costs, especially since entitlements are virtually impossible to withdraw.

Banking System

The economists also suggest persisting with the banking clean-up which began when Rajan was RBI governor. His successor Urjit Patel continued with many of the policies but stepped down after a stand-off with the government on issues which included the RBI’s tough banking regulations. According to the economists, key measures needed include:

  • Cleaning up bank balance sheets by reviving projects that can be revived after restructuring debt.
  • Improving governance and management at the public sector banks and then recapitalising them.
  • De-risking banking by encouraging risk transfers to non-banks and the market; and reducing the number and weight of government mandates for PSBs, and banks more generally.

Non-Bank Lenders

The economists noted that the non-bank financial sector needs a strong banking system as well as deep equity and bond markets, supported by liquid secondary markets and a robust regulatory and legal infrastructure. Key priorities include:

  • Developing a liquid and deep corporate bond market through policies to encourage institutional investor participation.
  • Enhancing liquidity in the government debt market and making it more attractive to institutional and retail investors.
  • Developing missing (or nascent) markets like fixed income derivatives to hedge the credit and interest rate risk of fixed income securities.

Reforming Agriculture

The economists stressed on the need to reform agriculture and supported a move towards fixed cash based subsidies. Some of their suggestions included:

  • Increase investment in research covering new seeds and latest farming and irrigation techniques.
  • Eschew loan waivers that divert resources from needed investment.
  • Ensure that farmers receive more of what is paid by the consumer by improving farmer access to domestic and international markets by reducing fees, restrictions on competition and building the necessary infrastructure.
  • Move to a fixed cash subsidy per acre cultivated based on digitizing and identifying plots (as demonstrated successfully by the Rythu Bandhu Scheme of the Govt. of Telangana)

Reviving The Infrastructure Sector

Commenting on the need to speed up the pace of infrastructure build-out in the economy, the economists suggested revitalising public-private partnerships and bringing in policies that encourage asset recycling. Some of the suggestions in the report include:

  • Untangling stalled projects through continued efforts to improve the land acquisition process, addressing environmental clearance issues, improving raw material availability and establishing various sector regulators.
  • Improving access to land for development, through computerized land mapping, government guaranteed titling, the creation of land banks, use of auctions for land acquisition, etc.
  • Freeing up public resources for investment through public finance reforms (asset recycling, asset swaps, expenditure reform).
  • Revitalising public-private-partnerships with appropriate and enforceable risk allocation.
  • Creating Special Economic Zones, not necessarily with a sole focus on exports, but also for domestic production.

Here’s the full report as well.

An Economic Strategy for India.pdf