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Stay away from crony loans, focus on high quality loans: CEA Subramanian

Chief Economic Advisor KV Subramanian on Tuesday urged financial institutions to avoid crony lending and focus on high-quality loans for asset creation that will help the country grow into a $ 5,000 billion economy. .

He said that the Indian banking sector since the early 1990s has faced the problem of poor quality loans, especially on large loans, and funds are not given to most creditworthy borrowers but to capitalists. friends, which caused great distress.

“When the financial sector decides to lend to a particular borrower who is more connected even though that borrower may not be the most creditworthy, it means that the capital is not provided. There is an opportunity cost because the capital is not going to a more creditworthy borrower, ”Subramanian said at an event hosted by the Federation of Indian Chambers of Commerce and Industry (FICCI) on Tuesday.

It is the duty of the financial sector to ensure that an optimal allocation of capital occurs in the economy, he said.

“I think it’s extremely critical now that the financial sector takes on this responsibility of providing high quality loans, especially on the infrastructure side, and really avoids crony lending… I think that’s basically the mantra. the financial sector, ”he said. mentionned.

Subramanian also suggested strengthening corporate governance in the financial sector to ensure high-quality loans and link top management incentives to quality loans.

“Incentive mechanisms must be put in place to prevent crony lending, as infrastructure projects involve high gestation periods,” he added.

He said financial institutions should avoid “permanent” and “zombie” loans because they freeze capital for creditworthy borrowers.

Development finance institutions will play an important role as infrastructure finance requires very specialized expertise, he said. Finance Minister Nirmala Sitharaman in the FY22 budget proposed to set up a Rs 1 lakh crore development finance institution (DFI) to accelerate infrastructure finance activities.

The infrastructure financier, to be called the National Bank for Infrastructure and Development Finance (NaBFID), is to anchor the ambitious National Infrastructure Pipeline (NIP), under which around 7,000 infrastructure projects with an investment of Rs 111 lakh crore has been identified by the government.

Garry Johnson

The author Garry Johnson

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