Banks’ balance sheet clean-up imperative for growth, says Raghuram Rajan

"The banks will need government equity or preference share infusion."  

The ongoing clean-up of bank balance sheets will help spur economic growth and improve the lenders’ profitability, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Thursday. The RBI had conducted an asset quality review (AQR) of banks and identified specific accounts, which banks have to identify as non-performing in two quarters, October-December and January-March. As a result, bad loans have hit banks’ profitability in the third quarter with most of them posting heavy losses in Q3.

“While the profitability of some banks may be impaired in the short-run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way,” Mr. Rajan told delegates at the CII Banking Summit.

State Bank of India reported 62 per cent drop in its net profit on the back of over Rs. 20,000 crore rise in non-performing loans or bad loans.

Private banks, which are in a much better shape on the asset quality front, saw their business growing much more than their public sector counterpart, he said.

“Non-food credit growth from public sector banks, the more stressed part of the system, grew at only 6.6 per cent over the calendar year 2015… In contrast, non-food credit growth in private sector banks was 20.2 %, per cent.”

On the current decline in share prices of banks, Mr. Rajan said: “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 conducted by RBI and its aftermath.”

There are two polar approaches to loan stress. One is to apply band aids to keep the loan current and hope that time and growth will set the project back on track, he said. An alternative approach is to try to put the stressed project back on track rather than simply applying band aids. This may require deep surgery.”

During the fifth bi-monthly review of monetary policy in December last year, Mr. Rajan had said he intended to clean-up bank balance sheets by March 2017.

Justifying the move to ask banks to classify loans that were identified during the AQR as bad loans, Mr. Rajan said loan classification is merely good accounting — it reflects what the true value of the loan might be. “It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses. If the losses do not materialize, the bank can write back provisioning to profits.”

The Indian banking sector is seeing rise in stressed assets over the last three years. According to RBI data, stressed asset, that is gross NPA plus standard restructured advances, as a percentage of advances moved up to 11.3 per cent as on September 2015 as compared to 9.2 per cent in March 2013.

Mr. Rajan tried to ally fears of the market participants who are worried about the amount of bad loans that will be added to the system.

“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.”

The banks will need government equity or preference share infusion, he said. On its part, RBI will provide whatever liquidity is needed by any bank, he said.

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Printable version | Oct 15, 2021 5:21:17 PM |

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