Chief economic adviser (CEA) Krishnamurthy V Subramanian on Tuesday called on financial institutions to shun “crony-lending” and focus on the quality of advances to help create large-scale infrastructure assets and satiate the appetite of a fast-reflating economy.
Speaking at a Ficci event, he also pitched for clawing back compensation of senior management at financial institutions in cases where they resorted to crony-lending or ever-greening of loans with mala-fide intent. Such a claw-back provision will discourage “crony-lending”, which not just exacerbates bad loan risks but also deprives a worthy borrower of credit because an undeserving one has already cornered it.
However, bankers shouldn’t be harassed for honest business mistakes, he indicated. Prime Minister Narendra Modi, too, recently said the government recognizes the cycle of ups and downs faced by businesses. So, it doesn’t harbour the thinking that all transactional decisions by bankers that have gone wrong amount to malfeasance.
Prime Minister Narendra Modi had recently asked lenders to boost credit flow to critical as well as new sectors to satiate the growing appetite of a fast-recuperating economy, with an assurance that public-sector bankers won’t be harassed for honest business mistakes.
The CEA said the banking sector since the early 1990s has faced the problem of poor-quality lending, especially on large loans. Consequently, advances were not made to most creditworthy borrowers but to crony capitalists, leading to bad loan crisis, he added. The current government has blamed “indiscriminate lending” during the UPA era for the non-performing asset crisis in recent years.
“I think it is extremely critical now that the financial sector owns up to the responsibility of doing high-quality lending, especially on the infrastructure side, and really avoid crony-lending…,” Subramanian said. It is the duty of the financial sector to ensure optimal capital allocation in the economy, he added. According to the latest economic survey, the share of restructured loans jumped from 0.74 per cent in FY08 to 6.94 per cent in FY15 but the reported gross non-performing assets (NPAs) of banks didn’t rise as much from 2.2 per cent to 4.3per cent during this period. This is mainly because banks used the option of restructuring loans that were on the verge of defaulting without due regard to the viability of such loans. So, when an asset quality review (AQR) was ordered in December 2015, a massive amount of bad loans was suddenly detected.