Focus should move more to improving operational efficiency of stressed assets: RBI Governor

Mumbai, Aug 17 (KNN) India will have enormous project financing needs in the coming days, said RBI Governor Dr Raghuram Rajan adding that the focus should move more to improving the operational efficiency of stressed assets, and creating the right capital structure so that all stakeholders could benefit.

The current times are interesting, profitable and challenging for the financial sector. Interesting because the level of competition is going to increase manifold, both for customers as well as for talent, transforming even the sleepiest areas in financial services; profitable because new technologies, information, and new techniques will open up vastly new business opportunities and customers; and challenging because competition and novelty constitute a particularly volatile mix in terms of risk, Dr. Rajan said.

He was speaking at the FICCI-IBA Annual Global Banking Conference held here on Tuesday.

Stating that India will have enormous project financing needs in the coming days, the Governor hoped that banks will not be irrationally exuberant in lending this time.

According to him, first the focus should move more to improving the operational efficiency of stressed assets, and creating the right capital structure so that all stakeholders could benefit.

Toward this, he suggested simultaneous action on two fronts - a creative search for new management such as bonuses for meeting cash flow/profit benchmarks and stock options. teams, including the possible use of public sector firms or private sector agents, as also well-structured performance incentives

To lower the risks further, he suggested bringing in more in-house expertise to project evaluation, including understanding demand projections for the project’s output, likely competition, and the expertise and reliability of the promoter.

He also suggested that real risks should be mitigated where possible, and where not, shared contractually between the promoter and financiers, or a transparent arbitration system agreed upon.

 He also said that the financiers should put in a robust system of project monitoring and appraisal, including where possible, careful real-time monitoring of costs by using information technology (IT).

“It only required a stronger marriage between information technology and financial engineering with an important role for practical industry knowledge and incentive design,” he said. An incentive structure for bankers so that they structure and monitor loans carefully, and get significant rewards, including promotions, if loans worked out was necessary according to him.

Further, authorities like the central bank and the Government should, over the medium term, reduce the differences in regulatory treatment between public sector banks and private sector banks, and more generally, between banks and other financial institutions to encourage effective competition among them. This can be achieved by paying for delivery of mandates and targeting them better towards the truly underserved as also withdrawing preferential treatment, to the extent feasible, at commensurate pace. 

A parallel task for public sector banks was to improve the governance and management.