Reserve Bank of India (RBI) Governor Raghuram Rajan sought to assuage the feelings.
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Mumbai – Stressing that cleaner balancesheets will lead to future loan growth for banks, RBI chief Raghuram Rajan on Thursday said a “deep surgery” is must for the clean-up that would require an “anaesthetic” in the form of recognising NPAs on their books.
“Our estimate is that the Government support that has been indicated will suffice”, Rajan said, regarding the public sector banks that has received capital infusion from the government.
He also said RBI projections showed that only “a small minority” of state-owned banks would breach core capital requirements in the absence of any recapitalisation.
On Thursday, while India’s largest bank SBI reported a 62 per cent decline in profits in the third quarter ended December 31, 2015, Bank of India posted a net loss of ₹1,505.58 crore. “This verges on scare-mongering”, Dr Rajan told bankers at a Mumbai summit.
“Banks should either make full provision as per the guidelines or write off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants”. Rajan said what the government has already explicitly committed is enough to take care of all reasonable scenarios and the central bank will provide whatever liquidity is needed by any bank although it does not forsee any liquidity risk. On domestic banking, Rajan said that after having kick-started the process of differentiated banking with payments banks and small finance banks, RBI is studying the concept of “wholesale bank” now. “This may require deep surgery”, he asserted. Meanwhile, he also warned analysts against scaremongering about the level of stressed assets in the sector.
Think therefore of the NPA classification as an anesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet.
State Bank of India, the country’s biggest lender, slumped 3 percent on Monday after posting a slump in earnings as it soaked up more bad loans and provisions in line with a central bank drive to tidy up India’s banking industry.
The third quarter has seen the bad loans of banks, specially the public sector ones, mounting by leaps and bounds.
But to do deep surgery such as restructuring or writing down loans, the bank has to recognize it has a problem-classify the asset as a non-performing asset (NPAs).
“In sum, to the question of what comes first, clean up or growth, I think the answer is unambiguously “Clean up!”
Let me emphasize that all NPAs are not because of malfeasance. A Right to Information query by the Indian Express revealed that 29 public sector banks wrote off a combined Rs 1.14 lakh crore of bad debt between 2013 and 2015.
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In this context, the RBI Governor said the government has been fully involved and “supportive” in the process of cleaning up bank balance sheets and has promised to infuse more capital as part of the Indradhanush reforms.
