Raghuram Rajan Has Spoken The Full Truth About India's Bad Loans Problem

11/02/2016 10:40 PM IST | Updated 15/07/2016 8:26 AM IST
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Reserve Bank of India (RBI) governor Raghuram Rajan listens during a news conference at the RBI headquarters in Mumbai on February 2, 2016. India's central bank kept interest rates on hold citing the importance of controlling inflation and noting a slowing growth momentum in Asia's third-largest economy. AFP PHOTO / PUNIT PARANJPE / AFP / PUNIT PARANJPE (Photo credit should read PUNIT PARANJPE/AFP/Getty Images)

New Delhi -- Reserve Bank of India (RBI) governor Raghuram Rajan offered a great deal of clarity about India's bad loans problem in a speech on Thursday. He said some of the analysis surrounding the issue has bordered on scare-mongering.

The governor sought to allay fears of a deep-rooted malaise, and said while the central bank's asset quality review exercise will hurt short-term profitability of some banks, the cleaning up of bad loans will support future growth.

Rajan reiterated that the regulator’s aim is to have clean and fully provisioned bank balance sheets by March 2017.

Taking a dig at financial experts, who have come out with their own estimates of the size of stressed assets in the banking system, the RBI governor said that such claims verge on ‘scare-mongering.’

“With markets generally in decline, the decline in bank share prices has been more accentuated."

“There are some wild claims being made by some financial analysts about the size of the stressed asset problem. This verges on scare-mongering. Our projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalization, will be small,” Rajan said at CII banking summit in Mumbai.

Read the RBI governor's full speech here.

He said that for loans that are of concern, the banks are attempting to regularize those that can put back on and are classifying those that cannot be and provisioning those that cannot be.

“They will also make provisions for loans that have weaknesses. Our intent is to have clean and fully provisioned bank balance sheets by March 2017,” he said.

Referring to the sharp fall in banking stocks, the governor said that part of the reason was that the broader markets have been in turmoil and banking stocks, being a leveraged play on the economy, perform better on good days and worse on bad ones.

"In sum, to the question of what comes first, clean up or growth, I think the answer is unambiguously — Clean up!"

The BSE Sensex fell more than 3 percent on Thursday, recording its biggest daily fall in nearly six months, hitting the lowest level since May 2014, as fears of a slowdown in the global economy hit markets worldwide. As the broader markets have been on a weaker footing for a while now, banking shares have been one of the worst hit. State Bank of India fell 2.6 percent after saying quarterly net profit fell nearly two-thirds, below estimates.

“With markets generally in decline, the decline in bank share prices has been more accentuated. However, part of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty. Clearly, an important factor has been the Asset Quality Review (AQR) conducted by the Reserve Bank and its aftermath,” he said.

Rajan said that the RBI is working on identifying currently non-recognizable capital that is already on bank balance sheets, such as undervalued assets and that the apex bank could allow some of these to count as capital as per Basel norms, provided a bank meets minimum common equity standards.

Talking about the issue of slower credit growth in the last calendar year, he said that the stressed balance sheets of public sector banks is occupying management attention and holding them back, and added that the only way for them to supply the economy’s need for credit, which is essential for higher economic growth, is to clean up.

“The silver lining message in the slower credit growth is that banks have not been lending indiscriminately in an attempt to reduce the size of stressed assets in an expanded overall balance sheet, and this bodes well for future slippages. In sum, to the question of what comes first, clean up or growth, I think the answer is unambiguously — Clean up!,” the RBI governor said.


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