Deep surgery needed to clean up bank balance sheets, says RBI governor Raghuram Rajan

QUICK PILL

• Reserve Bank of India Governor Raghuram Rajan on Thursday said central bank and government efforts to clean up banks\' balance sheets would be successful.
• Banks are struggling under $100 billion of stressed loans, choking the financial system at a time when the economy needs fresh investment to galvanise growth.
• \"There are some wild claims being made by some financial analysts about the size of the stressed asset problem. This verges on scare-mongering,\" said Rajan.

Reserve Ban of India (RBI) governor Raghuram Rajan had recently spoken about loan defaulters and bad loans faced by banks in an interview with veteran journalist Shekhar Gupta.

Speaking on the same lines, he said that the central bank and government efforts to clean up banks' balance sheets would be successful. Meanwhile, he also warned analysts against scaremongering about the level of stressed assets in the sector. He was speaking at a banking summit organised by the Confederation of Indian Industry in Mumbai.

"While the impact of the regulator's asset quality review will hit the profitability of some banks in the short run, the clean-up will help support economic growth in the future," Rajan said.

"RBI expects the problem and the additional capital requirements of banks to be manageable....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."

The banking sector is struggling under $100 billion of stressed loans, choking the financial system at a time when the economy needs fresh investment to stimulate growth.

Also, the Bankruptcy law is still to see the light of the day. If passed, this law which is akin to USA's Bankruptcy code can liquidate funds from companies faring badly and push it back to the system.

Here are some crucial things he said:

• "The review was undertaken to ensure that banks were taking proactive steps to clean up their balance sheets. As part of the process, RBI has identified loans that are of concern, as well those that had potential weaknesses." -- Raghuram Rajan.

• "For the loans that are of concern, the banks are attempting to regularise the loans that can be put back on track, and are classifying those that cannot for deeper surgery-and taking provisions in accordance with the degree of extant stress in the loan. 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." -- Raghuram Rajan.

• "There are some wild claims being made by some financial analysts about the size of the stressed asset problem. This verges on scare-mongering." -- Raghuram Rajan.

• "RBI will provide whatever liquidity is needed by any bank that needs it, though we do not foresee liquidity stress." -- Raghuram Rajan.

Banks under stress due to NPA and RBI's asset quality review:

The profits of a number of banks, particularly public sector banks (PSU), have taken a fall because of the RBI's asset quality review. This has primarily sent bank stocks tumbling. For 30 of the 39 listed banks that have reported earnings so far, gross NPAs* have risen 26 per cent quarter-on-quarter and are up 40 per cent compared to a year ago, as reported by LiveMint

NPA / Non-performing assets: A classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset.