The Reserve Bank of India (RBI) on Tuesday warned of an uneven sharing of risks and returns in large Indian companies where promoters retain the upside in good times and have limited accountability in times of crisis.
Promoters of companies have a class of “super” equity, which retains all the upside in good times and very little of the downside in bad times, while creditors, typically public sector banks, hold “junior” debt and get none of the fat returns in good times while absorbing much of the losses in bad times, RBI governor Raghuram Rajan said at the third Dr Verghese Kurien lecture at the Institute of Rural Management, Gujarat.
“Why this state of affairs? The most obvious reason is that the system protects the large borrower and his divine right to stay in control,” Rajan said.
A large borrower, whose loan has turned bad, should not be “lionised as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country,” he said.
Rajan said the central bank was exploring ways to provide more flexibility to restructure distressed assets. “Banks want greater flexibility to restructure loans and the ability to take equity so as to get some upside in distressed projects, these are legitimate concerns,” he said.