Raghuram Rajan wants individual bankers to take onus for large loans

Mumbai: Reserve Bank Governor Raghuram Rajan on August 16 said there is a need to shift loan sanctioning process from the present committee-based approach to single banker taking up the responsibility as well as rewarding the person if the project goes on well.

Addressing the annual bankers conference, Rajan said, "Even while committees may take the final loan decision, some senior banker ought to put her name on the proposal, taking responsibility for recommending the loan."

To achieve this, the Governor said, "The incentive structure for bankers should be worked out so that they evaluate, design and monitor projects carefully, and get significant rewards if these work out."

Addressing bankers' body IBA and Ficci organised banking summit, Rajan said technology can go a long way in helping arrive at a better due diligence.

"IT systems within banks should be able to pull up overall performance records of loans recommended by individual bankers easily, and this should be an input into their promotion," he said.

Asking to adopt more technology for risk assessment, Rajan said "Financiers should put in a robust system of project monitoring and appraisal, including where possible, careful real-time monitoring of costs. He also asked bankers whether a project input cost be monitored and compared with comparable inputs elsewhere using IT, so that suspicious transactions suggesting over-invoicing are flagged It can be noted that currently large loans are sanctioned by a loan approval committee and no individual banker is held responsible if the loan goes kaput.

Underling the need for the project developer to have more of his skin in the project, the Governor said there is a need for more equity on one side and flexible loan structuring process on the other for infra projects financing by having a more flexible capital structure in place.

"The capital structure has to be related to residual risks of the project. The more the risk, more the equity component should be and the greater the flexibility in the debt structure," he said.

Stating that incentivisation should work both ways, which means even the promoters should be rewarded for delivering on time, Rajan said, "promoters should be incentivised to deliver, with significant rewards for on-time execution and debt repayment. "Where possible, corporate debt markets, either through direct issues or securitised project loan portfolios, should be used to absorb some of the initial project risks. More such arm's length debt should typically refinance bank debt when construction is over," Rajan said.

He also expressed optimism over some of the steps taken to strengthen corporate debt markets, including the new bankruptcy code, should make this possible.

Delivering his keynote speech, entitled 'Interesting, Profitable, and Challenging: Banking Today', the outgoing Governor said, "risk and cost reduction through information technology and risk management techniques will tend to increase effective risk-adjusted spreads."

Suggesting ways to lower risks and increase loan portfolio, specially the project financing, Rajan said bankers badly need "to significantly introduce 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.

Bankers will have to develop industry knowledge in key areas since consultants can be biased.

Secondly, real risks have to be mitigated where possible, and shared where not.Real risk mitigation requires ensuring that key permissions for land acquisition and construction are in place up front, while key inputs and customers are tied up through purchase agreements. And that wherever these risks cannot be mitigated, they should be shared contractually between the promoter and banks or a transparent arbitration system agreed upon.

So, for instance, if demand falls below projections, perhaps an agreement among promoters and financier can indicate when new equity will be brought in and by whom, the Governor said.