Chief Economic Advisor (CEA) K Subramanian on Tuesday called for provision for clawing back compensation and incentives of top management in the financial sector in case evidence of 'crony lending' is found against them.
Calling crony lending a "big problem", K Subramanian said, "The job of the financial sector is to do optimal capital allocation in the economy. Since 90s the key problem is of quality of lending in case of large loans. The exact word is crony lending. We have shown in the economic survey that over the years the non-performing assets (NPAs) have emerged from the large loans that have not necessarily been lent to the most credit borrowers." Subramanian was speaking at a webinar organised by the Federation of Indian Chamber of Commerce and Industries (Ficci) on distressed debt in Indian infrastructure.
"This is a generic problem in the financial sector but gets far more exacerbated in infrastructure lending," Subramanian added.
Calling upon the financial sector to put an end to the practice of evergreening and zombie lending, Subramanian said, "Zombie lending and evergreening needs to be avoided as it leads to sub-optimal capital allocation to projects. With this more capital follows the undeserving projects than the deserving ones."
He went on to suggest that since tools are now available to identify whether such practices were done in the past, there should be provision wherein "compensation to the senior management should be clawed back."
"Adverse selection problems is all about choosing to give a loan to a crony rather than a more credit-worthy borrower. The financial sector needs to grapple with this issue. Every financial institution has to take that leadership role and not look at the external factors and ensure that the capital allocation in the economy especially in infrastructure is of high quality," said Subramanian.
The CEA's observations come at a time when the government has enhanced allocation for infrastructure sector in the budget, and is betting big on capital expenditure for economic revival post Covid disruptions.