Scrap non-viable projects - IDBI official

By Our Special Correspondent

MUMBAI, DEC. 4. The establishment of asset reconstruction company and further revamping of legal system would go a long way in taking the burden of non-performing assets (NPAs) off the shoulders of developmental financial institutions (DFIs), said Mr. T. M. Nagarajan, Executive Director of Industrial Development Bank of India (IDBI).

The existing portfolio of DIFs is dominated by exposure to traditional sector and industries susceptible to cyclical changes. ``Most of the projects, undertaken prior to reform and then viable in the protective environment are now under stress, impacted by the sweeping cold winds of global competition in the wake of trade reforms,'' Mr. Nagarajan said, adding, ``totally non-viable or non revivable projects may have to be scrapped, without causing any systemic turbulence.''

While delivering a talk on ``Development Banking for the New Millennium - Prospects & Challenges'' at the American Alumni Association, here, Mr. Nagarajan said, DFIs could no longer afford to go on supporting such unsustainable projects endlessly. Time has come for DFIs, to call it a day in respect of these projects, cut the loss and exit. ``A painful decision, no doubt,'' he said, ``but it is inevitable, if DFI itself were to remain a performing assets of the nation.

Further Mr. Nagarajan said a number of steps had already been taken to improve the legal system and lot more needed to be done to facilitate accelerated recovery of institutional dues from the borrowers. In cases of projects passing through a period of strain but capable of succeeding in the long run, however, a long term view needs to be taken, to avoid economic waste.

``DFIs would need to induce, encourage, support and if necessary, force consolidation and restructuring of such worthwhile projects in distress,'' he added. Prudential guidelines need to be fine- tuned to encourage such restructuring exercise so as to minimise the impact of provisioning cost on the financials of DFIs, but with a requirement of appropriate disclosures.

Propelled by commercial considerations on the one hand and the regulatory directions on the other, DFIs are perforce moving towards universal banking. Their movement, however, encounters impediments of regulatory burden on the way. Suggestions for application of prudential requirements at incremental level are yet to gain acceptance. Mr. Nagarajan said the impact of reserve requirements on the backlog of liabilities of DFIs would be too severe to bear. DFIs may have to wait for an across the board reduction in the level of reserve requirements.

Send this article to Friends by E-Mail

Section  : Business
Previous : Industrial slowdown 'accentuated' - CII update
Next     : Rupee improves on renewed dollar sales