Troubled projects need conversion of debt: Raghuram Rajan

In a marked turnaround from earlier policies where the RBIand the finance ministry took an almost adversarial stance on inflation targeting, the central bank and the government appears to have arrived at a consensus that controlling prices is the key. Fortunately for borrowers, the decision comes at a time when a 38% fall in crude prices during the quarter is helping the RBI to talk of a more accommodative stance. In a select interaction, RBI governor Raghuram Rajan provided some insights into the policy stance. Excerpts Stock Market Trading Tips

What is the RBI doing to improve transmission of interest rates to borrowers? 

We can look at the adherence of banks to existing policies (on computing base rate). I would also like them to feel the competitive factors that force them to reduce. We cannot micromanage the lending process too much. If banks cut the base rate but increase the spreads over the base rate, you are back where you were.Free Stock Share Tips 

When is RBI going to target 4% inflation? 

The government is on the same wavelength on the desirable level of inflation as we are. The previous government did not have a strong view (on inflation targeting) but this government seems to have reflected on that and there is a sense that 4% and plus or minus 2% is something it is comfortable with. My personal view of 4% target is that the industrial countries are at 2% plus, the 2% productivity growth that we have should give us 4%. I expect that we enter at the top of the (4% to 6%) band and move toward the centre. Financial Astrology Trading Tips

What is the rationale behind allowing converting of loans into equity? 

Conversion of debt to equity was stopped because it could be used to mask bad debts. The counter argument is that if you distrust banks during recasting you are not going to get restructuring. Many projects are in trouble and will need fresh infusion of funds. To get infusion you will have to restructure the capital structure somewhat. Equity does mean taking a softer claim in place of a harder claim. But the alternative is write off the debt and hope that the borrower will compensate later. This way the right of compensation is embedded in the equity. 
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On the price at which debt conversion can take place... 

We are talking to Sebi to see if we come to an agreement on the price. Sebi has the interest of minority shareholders at heart we don't want the price to be too low, then the value gets transferred from minority shareholders. We don't want it to be too high, then the value gets transferred from the banks. Intraday Trading Tips

On compelling foreign banks to operate as wholly-owned subsidiaries (WoS)... 

One of the concerns of foreign banks is the priority sector. We said that we will revisit the priority sector norms after discussion with government and once we have consensus on that we will push for WoS. The whole idea behind WoS is that we have control over the bank's capital and it does not get taken away in the stealth of the night to some other jurisdiction. Since we do not have a resolution system across the world a variety of countries are moving to having WoS. 

Will the RBI have a say in the appointment of PSU bank chairman? 

Currently, the RBI is a full partner in the selection process. We do not want to be a partner in the long-term. That's where the conflict of interest comes up. On the one hand, we are selecting the people, and on the other, we are regulating them. Right now the government wants us to be part of the process to get the system back on track.Jackpot Trading Tips