Lenders ‘can’t be asleep’, must suffer compensation cut for bad loans: CEA | Business Standard News

Clipped from: https://www.business-standard.com/article/finance/lenders-can-t-be-asleep-must-suffer-compensation-cut-for-bad-loans-cea-121030900761_1.html

Ever-greening and zombie loans lead to sub-optimal capital allocation, says Chief Economic Advisor.

Chief Economic Advisor K V Subramanian

Senior management of lenders and financial institutions must suffer a be cut in their compensation for crony lending and ever-greening of loans, said the government’s Chief Economic Advisor K V Subramanian on Tuesday.

“Financial sectors should ramp up on its corporate governance and each institution and lender should own up the responsibility. Infrastructure projects are of very long durations so incentives of senior management aligned in such a way that board can’t be asleep on a wheel especially on zombie lending.” he said during a webinar organized by business association FICCI on distressed debt in the infrastructure sector.

Subramanian said ever-greening and zombie loans lead to sub-optimal capital allocation. He also asked auditors to use more data analytics to identify crony lending. “Auditor being the first line of defence on it need to really look at loan by loan and identify zombie lending. There is enough research and data analytics which can be used to trace such instances.”

Recognising the bad loans problem in the financial system, he said that it stems from large loans which are not necessarily lent to creditworthy borrowers, though it’s a generic issue but far more exacerbated for infrastructure lending. So financial institutions especially need to be working on these aspects and should take a leadership role in making India a $ 5 trillion economy, he said.

Instead of focusing on external factors, they should look internally for projects of infrastructure and capital allocation to be made in high quality. “Capital allocation to the infrastructure sector has to be of high quality and the financial sector has an important role in this regard. The financial sector should refrain from resorting to crony lending, which would put the brakes on lending and the economy will suffer,” he explained.

Subramanian said the operational aspects of different projects are different. “Once a loan goes into distress, it blocks capital for credit-worthy borrowers. In such a scenario, the lenders will have to take complete responsibility.” He said that the country is placing emphasis on growth through infrastructure.

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