I am not for doing things and then reversing them: Raghuram Rajan11 min read . Updated: 04 Feb 2015, 12:06 AM IST
RBI governor Rajan says central bank in favour of banks converting their debt to equity at a reasonable price
RBI governor Rajan says central bank in favour of banks converting their debt to equity at a reasonable price
The Reserve Bank of India (RBI) is in favour of banks converting their debt to equity but at a reasonable price, the central bank’s governor Raghuram Rajan said. In an interaction with the press after announcing the bimonthly monetary policy on Tuesday, Rajan talked about RBI’s discussion with the Securities and Exchange Board of India (Sebi) on norms for conversion of debt to equity by banks and said the final guidelines will be announced shortly. The banking regulator also said that new loans given to defaulters who want to revive their projects will not be classified as bad loans. Excerpts:
Will you allow acquisition financing in case of chronic non-performing assets (NPAs) and wilful defaulters? What about lenders converting their debt to equity in stressed companies?
We have no problem with acquisition financing, there are no restraints on it. What we have said is that in case the plant is not completed and there is a possibility that it was because of the promoter not having enough funds and not enough management capabilities and in case there is a distinctly new promoter brought in, then banks could get some more time to complete the project with the new promoter. If there are reasons beyond control like the unavailability of inputs and so on, that is a different situation.
Banks can take equity position, up to the 30% stake ceiling. Couple of banks can gain control if they decide to convert their debt to equity using this convertibility clause. Alternatively, in restructuring, they can embed a convertibility clause and that will allow them to take control in case the restructuring does not pan out as promised. This will allow a more effective transfer in case there is a need for change in management. Sebi and RBI are discussing the details of conversion, the price at which it will convert, etc. Sebi, of course, is interested in protecting the rights of the minority shareholders and RBI is interested that banks don’t convert at too high a price given the fair value. That discussion is coming to some agreement and we will see guidelines within a short while.
Usually companies which have been classified as NPAs (non-performing assets) with banks find it very difficult to find further credit from the banking sector. Do you think this also delays the revitalization of these assets that we are aiming to achieve?
I think we should not attribute stigma to an NPA and this is a misconception both among producers as well as lenders. The producers think that if their account is labelled as NPA, it means they are at fault. It just means that the account is not paying and there could be legitimate reasons as to why it is not paying—because of policy inaction, legal complications, etc. The fact that an account is an NPA is an accounting statement. It is not a statement about blame or reputation. Even if an account is an NPA, banks can lend to it. The new loans, so long as they are serviced—and there could be a moratorium on them also—that loan is not considered NPA. Projects that are halted, because they are NPAs, could be restarted with new loans from banks. There is nothing that prohibits that. What is important is that banks make a calculation that these loans are necessary to restart the process. I am not going to micromanage the decisions from here, but I am going to say that if those loans are made, they are perfectly appropriate and they will not be considered NPAs.
RBI’s forbearance in asset classification of restructured assets will cease to exist after 1 April this year. The banking segment has asked for some extension in this deadline. Will you consider this?
I have said repeatedly that it is important we clean up bank balance sheets. We show what the balance sheets actually contain and that will enhance confidence in the bank balance sheets and enable the banks to raise the much-needed fresh capital. In order to build confidence in bank balance sheets, we have to come to an end of forbearance. We have to put banks on the right track. We have given enormous amounts of new flexibilities in trying to put distressed projects back on track. But I do not think the answer is to pretend and extend or extend and pretend, it is to call a spade a spade. Do what is needed, including making new loans if necessary to complete the project, but move on beyond that.
What is your outlook on the monetary policy stance in the year ahead? What is the level of real rate that you are expecting in the economy?
We’re looking for developments on the disinflationary process, we would like to see it continue, and of course on the fiscal front, we have the budget coming up. Those are important developments that we have to pay attention to now. We would like the forces that are in play, including the transmission of lower oil prices, to stay low for the coming year. As these lower prices feed into prices generally, that will help the disinflationary process. Also, we have had a relatively stable exchange rate so far that will also help to some extent. There has been some action on food management. Of course this is the season when the vegetable prices start picking up and we would like to see how those will play out. There is no single item that we are waiting for, but (after the budget) we will have more data than what we had on 15th January. Until we get more data, I think we are on pause. I have said before that about 1.5-2% is a reasonable real rate given where we are in the business cycle.
Most large banks have stayed away from passing on the recent repo rate cut to their customers. Will you nudge them into cutting rates?
The Reserve Bank is not the owner and is not in any way involved in the day-to-day running of the banks. That is a decision that the owner and management has to take. So we cannot nudge them. We can only comment on the fact that despite a fall in long-term interest rates, with treasury rates having come off a significant amount in the last year-and-a-half and corporate bond rates also having come down substantially, bank lending rates have remained flat over this period. You see some movement on the rate offered on new loans made by banks, but in general, base rates haven’t changed. When you talk to banks, they are very happy when we cut rates. At some point my sense is that transmission has to take place.
Call money rates have come down, we have been infusing enough liquidity into the markets and therefore we will see transmission operate there because it will reduce the cost for corporations to borrow from the market. Banks will have to match that at some point.
Will you stick to the baby-steps approach that RBI had adopted earlier, where rates were reduced slowly in small quantities? How long will this pause continue?
We paused for 15 days, come on! Monetary policy is a long-term process, so don’t hold me every 15 days to something new. What we have said is that we are waiting for data. We have a budget coming up and that is a significant change in the fiscal space. It is an important change. We have new gross domestic product (GDP) growth numbers coming in on 9 February, which will reflect a whole new view of what is happening in the economy. Now if I cut interest rates today, in two weeks you will be asking me when I will be cutting rates again. Let the monetary policy process follow its due course. Remember that monetary policy works with long and variable lags. In India, approximately three quarters. So we cut interest rates, it doesn’t do the economy good for three quarters. I am not for doing one thing and reversing them, so let’s wait for more information to come.
You spoke about a stable exchange rate. There has been a talk of a lot of intervention by RBI in the foreign exchange market. Do you think there is excess appreciation in the rupee?
I think at present it would be wrong to say that we have become grossly uncompetitive. As we know there are different estimates on what the correct exchange rate is. If we just add inflation we get the impression that our real effective exchange rate has appreciated quite a bit, but if we couple that with productivity growth, then we will see that the appreciation is significantly more moderated. But that said, we have to be a little careful in this world. People keep looking at the exchange rate vis-a-vis the dollar and say that our currency is weak, but we have strengthened versus virtually every other currency. It is something that we have to be watchful for. We do not intervene to try and target a particular level for the exchange rate. When we do intervene it is to reduce volatility and we have intervened in both directions in recent months and weeks. We both buy and sell, so it is not in any way an attempt to go one-directional. I think we are perfectly comfortable with where the rupee is but it is a risk that we have to keep in mind moving forward, with the massive amounts of quantitative easing that are going on in the rest of the world that there are possible dangers of us becoming uncompetitive on that dimension.
You have allowed foreign investors to reinvest the interest in government bonds. Why not open up the limits for longer term investments?
We do want to manage the country’s balance sheet to make sure that we have a bulletproof balance sheet when the inevitable interest rate rises come. We have taken two actions in that regard this time, recognising that we wouldn’t want to be seen against foreign investors and given that we want to expand limits on a regular basis. Given the interest in India today, if we just expand the FDI (foreign direct investment) limits in government securities by, let’s say $5-10 billion, it will be taken up in a couple of weeks and we will still get people wanting us to open more. We thought a more streamlined way of doing it would be to allow reinvestment of interest, which is a more regular feature and which will allow some room for our patient investors who have stayed with us, to reinvest their coupons. We have seen a considerable amount of investments on the short end in corporate securities. When we limited reinvestment in government securities below three years we did not do the same thing in the corporate because we wanted to develop the corporate market also. There has been some of that, but again there is too much sitting at the short end. We would like to nudge people to the longer end. So we said that when you reinvest, you reinvest in the three-years-and-above securities. Hopefully that will alleviate some of the pressures that could be building up in the corporate debt market. This is a prudential measure again. Let me emphasise that we are open to foreign investors, we welcome them.
Do you think India is in a better place today, as compared with last year, to weather the US Federal Reserve’s tightening cycle? Have the markets already priced in this tightening cycle?
First, I am not sure that we know fully the process that the Federal Reserve will follow. As you know, the Federal Reserve introduced a phrase on the international situation in its statement this time. I have no doubt that the exports and the dollar will play some role in their future deliberations. As far as India’s position goes, we have made important strides in three out of four macro variables and I am hopeful that on the fourth we will also move. Firstly, on growth, we never plunged as much as some of our competing countries. Of course, if we take the new statistics at face value, we are already up to 6.9% and though we don’t want to read into it too much since we need to understand it further, that is one of the highest growth rates in the world. Even if we stick to our growth projections of 5.5%, we are doing pretty well for this year. The second element that has improved considerably is our current account deficit which we project to be 1.3% this year and perhaps even lower next year due to the lower oil price, so long as it stays low. The third element has been the inflation. Investors are worried about the value of the rupee. Since the inflation has come down, the rupee has remained largely stable. The fourth element is the fiscal deficit. We have made some important strides there and this is where the budget would be an important factor in establishing the continued confidence that our actions are all in the right direction. A secondary aspect which is important to help us is the build-up of reserves. Our reserves are substantially higher and even the net of forward positions today are positive as compared to negative last year and therefore we are in a much better position.
Will we be immune to volatility? The answer is no. I think everyone is affected by volatility. But after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than competing countries.