NEW DELHI: Chief Economic Advisor KV Subramanian on Tuesday urged financial institutions to avoid crony lending and focus on high-quality loans for asset creation that will help the country grow into a trillion economy of dollars.
Observing that the Indian banking sector since the early 1990s has faced the problem of poor quality loans, especially on large loans, he said loans are not given to most creditworthy borrowers but to capitalists. cronyism, which caused great distress.
“When the financial sector decides to actually lend to a particular borrower who is more connected even though that borrower may not be the most creditworthy, it means that the capital is not provided.
There is an opportunity cost because the capital does not go to a more creditworthy borrower, ”he said at an event organized by the chamber of industry FICCI.
It is the duty of the financial sector to ensure an optimal allocation of capital in the economy, he added.
It should be noted that the problem of bad debts in the banking sector is largely due to the high exposure of banks to infrastructures facing problems in several respects.
“I think it’s extremely critical now that the financial sector takes on this responsibility of making high quality loans, especially on the infrastructure side, and really avoids crony lending. I think that’s basically the mantra of the financial sector, “he pleaded.
He also suggested strengthening corporate governance in the financial sector to ensure high quality loans and link top management incentives to quality loans.
“Incentive mechanisms must be put in place to prevent crony lending as infrastructure projects involve high gestation periods,” he added.
Financial institutions should avoid perpetual loans and zombie loans, as they tie up the capital of creditworthy borrowers, he added.
Subramanian said the development of financial institutions will play an important role as infra-financing requires very specialized expertise.
The government has proposed to create a 1 lakh rupee development finance institution (DFI) to accelerate infrastructure finance activities.
The infrastructure financier, called the National Infrastructure and Development Finance Bank (NaBFID), must anchor the ambitious National Infrastructure Pipeline (NIP).
Around 7,000 projects have been identified under the NIP with a planned investment of a whopping Rs 111 lakh crore during 2020-25.
Speaking at the event, the Chairman of the Insolvency and Bankruptcy Board of India, MS Sahoo, said that out of 4,000 companies admitted for insolvency, 2,000 companies had completed the process.
Resolving distressed assets brings more value than liquidation, he said, adding that in some companies it was as high as 300% of liquidation value.