RBI’s bad loan cleanup mechanism is prudent -says Raghuram Rajan

In his last monetary policy declaration, Governor Raghuram Rajan asserted that the RBI is comfortable with bad loan recognition process by banks. In a nearly non-event policy statement, Rajan has engaged the most disturbing element of his term – rising bad debts with banks.

Criticism from several quarters including from the Supreme Court has raised doubts about the ability of existing arrangements including the issue of handling wilful defaulters to check NPAs.

“Banks have certainly taken a lot of steps… the culture of cleaning up seems to be well embedded as well as the culture of recovery on some of the loans” Rajan told the media.

The RBI had deployed several tools to identify and manage bad debts over the last two years adding to the existing ones ever since NPAs started mounting.

The Special Mention Account (SMA) scheme, Strategic Debt Restructuring Scheme are the latest ones to tackle the bad debt menus. RBI Governor observed that some of the bad loans will be back on track with health as the economy comes to higher growth path.

On Tuesday, Raghuram Rajan defended the practice of debt restructuring as a way to make the bad debt to performing ones. Here he observed that several large distressed projects are on stalled mode and a chance has to be given for them to repay the loans.