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Rajan says measures to improve JLF functioning on the anvil

Mumbai: As criticism about the misuse of the recently-formed joint lenders’ forum (JLF) mounts, Governor Raghuram Rajan today said the Reserve Bank will shortly announce some measures that should improve the functioning of the forum.

“We have discussed the experience with the JLF with banks and we will shortly announce some measures that should improve their functioning,” Rajan told the annual banker conference Fibac here, even as he defended the mechanism over the CDR (corporate debt restructuring cell).

Defending the scrapping of the CDR cell, Rajan said the regulatory forbearance, where the RBI makes it easy for banks to “extend and pretend”, is not a solution, as stressed loan evergreening will only further confound the matters for the lenders.

Regulatory forbearance is not a solution since no other stake-holder, such as the promoter, tariff authorities, tax authorities, etc contribute to resolution, the real project limps along becoming increasingly unviable, he said, adding that “forbearance is also a disservice to the banks.”

To deal both with project paralysis and unfair distribution of losses, RBI ended the forbearance on restructured loans. Effective last August, restructured loans are being classified as non-performing loans. And thus if a loan is identified as overdue for over 60 days, all lenders have to come together in a joint lenders forum to see how the underlying problems can be fixed.

Noting that in dealing with stressed assets, the RBI has been focused on getting the underlying real project back on track, he admitted that there are issues for banking in immediately labelling a troubled account as NPA.

Mentioning clearly the plight of the state-run power distribution companies as the clear example of the regulatory forbearance being misused, Rajan recalled that “in 2012, a number of states signed up to a financial restructuring plan (FRP) with banks and the Centre, based on which RBI permitted restructured loans to discoms to be treated as standard.

“Unfortunately, three years later, states have not undertaken many of the actions promised under the FRP, perhaps because the urgency to act was not there so long as banks continued financing losses. Meanwhile, debt has built up further, and the cost of power, including line losses and interest costs, is mounting inordinately,” Rajan said.

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